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The Multi-Period CAPM and the Valuation of Multi-Period Stochastic Cash Flows

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  • Kazemi, Hossein B.

Abstract

This paper develops a valuation formula for multi-period stochastic cash flows consistent with rational risk-averse investor behavior and equilibrium in securities markets. It shows that the CAPM does not have to be sequentially applied in discounting of the cash flows of multi-period projects, and a single beta can be used to measure the riskiness of an uncertain income stream. Hence, a multi-period project is priced as if it offers a single payment. The formula uses a set of assumptions that is slightly more restrictive than the minimum set Constantinides (1980) uses to produce the multi-period version of the CAPM. This paper also demonstrates that, under certain assumptions, covariances of stochastic cash flows with changes in the term structure may be sufficient measures of the cash flows' riskiness.

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  • Kazemi, Hossein B., 1991. "The Multi-Period CAPM and the Valuation of Multi-Period Stochastic Cash Flows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 223-231, June.
    • Handle: RePEc:cup:jfinqa:v:26:y:1991:i:02:p:223-231_00
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    Cited by:

    1. Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 185-221, May.
    2. Rainer Niemann & Caren Sureth, 2002. "Taxation under Uncertainty – Problems of Dynamic Programming and Contingent Claims Analysis in Real Option Theory," CESifo Working Paper Series 709, CESifo.
    3. Niemann Rainer & Sureth Caren, 2005. "Capital Budgeting with Taxes under Uncertainty and Irreversibility / Investitionsplanung mit Steuern bei Unsicherheit und Irreversibilität," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 225(1), pages 77-95, February.
    4. Bertram, William K., 2008. "Measuring time dependent volatility and cross-sectional correlation in Australian equity returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(13), pages 3183-3191.
    5. Marcin Dec, 2019. "From point through density valuation to individual risk assessment in the discounted cash flows method," GRAPE Working Papers 35, GRAPE Group for Research in Applied Economics.

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