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On the Valuation of Long-Dated Assets

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  • Ian Martin

Abstract

I show that the pricing of a broad class of long-dated assets is driven by the possibility of extraordinarily bad news. This result does not depend on any assumptions about the existence of disasters, nor does it apply only to assets that hedge bad outcomes; indeed, it applies even to long-dated claims on the market in a lognormal world if the market's Sharpe ratio is higher than its volatility, as appears to be the case in practice.

Suggested Citation

  • Ian Martin, 2012. "On the Valuation of Long-Dated Assets," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 346-358.
  • Handle: RePEc:ucp:jpolec:doi:10.1086/666527
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    References listed on IDEAS

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    1. David Backus & Mikhail Chernov & Ian Martin, 2011. "Disasters Implied by Equity Index Options," Journal of Finance, American Finance Association, vol. 66(6), pages 1969-2012, December.
    2. Ian W. Martin, 2013. "Consumption-Based Asset Pricing with Higher Cumulants," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 745-773.
    3. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, January.
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    Citations

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    Cited by:

    1. Gollier, Christian, 2012. "Asset pricing with uncertain betas: A long-term perspective," IDEI Working Papers 752, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Gollier, Christian, 2012. "A theory of rational short-termism with uncertain betas," LERNA Working Papers 12.14.371, LERNA, University of Toulouse.
    3. repec:spr:decfin:v:40:y:2017:i:1:d:10.1007_s10203-017-0192-x is not listed on IDEAS
    4. Gollier, Christian, 2017. "Valuation of natural capital under uncertain substitutability," TSE Working Papers 17-813, Toulouse School of Economics (TSE).
    5. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
    6. Ian Martin, 2013. "The Lucas Orchard," Econometrica, Econometric Society, vol. 81(1), pages 55-111, January.
    7. Dutt, Tanuj & Humphery-Jenner, Mark, 2013. "Stock return volatility, operating performance and stock returns: International evidence on drivers of the ‘low volatility’ anomaly," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 999-1017.
    8. Koijen, Ralph S.J. & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2017. "The cross-section and time series of stock and bond returns," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 50-69.
    9. Chabi-Yo, Fousseni & Leisen, Dietmar P.J. & Renault, Eric, 2014. "Aggregation of preferences for skewed asset returns," Journal of Economic Theory, Elsevier, vol. 154(C), pages 453-489.
    10. Martin L. Weitzman, 2012. "Rare Disasters, Tail-Hedged Investments, and Risk-Adjusted Discount Rates," NBER Working Papers 18496, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G1 - Financial Economics - - General Financial Markets
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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