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Asset pricing with uncertain betas: A long-term perspective

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  • Gollier, Christian

Abstract

How should one evaluate investment projects whose CCAPM betas are uncertain? This question is particularly crucial for projects yielding long-lasting impacts on the economy, as is the case for example for many green investment projects. We defined the notion of a certainty equivalent beta. We characterize it as a function of the characteristics of the uncertainties affecting the asset’s beta and the economy as a whole. We show that its term structure is not constant and that, for short maturities, it equals the expected beta. If the expected beta is larger than a threshold (which is negative and large in absolute value in all realistic calibrations), the term structure of the certainty equivalent beta is increasing and tends to its largest plausible value. In the benchmark case in which the asset’s beta is normally distributed, the certainty equivalent beta becomes infinite for finite maturities.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 752.

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Date of creation: Nov 2012
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Handle: RePEc:ide:wpaper:26544

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Keywords: asset prices; term structure; risk premium; certainty equivalent beta.;

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  1. Traeger, Christian P., 2008. "Sustainability, Limited Substitutability and Non-Constant Social Discount Rates," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt10d7d7n4, Department of Agricultural & Resource Economics, UC Berkeley.
  2. Gollier, Christian, 2009. "Ecological Discounting," TSE Working Papers 09-062, Toulouse School of Economics (TSE).
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