On the Valuation of Long-Dated Assets
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.
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References listed on IDEAS
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- 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.
- David Backus & Mikhail Chernov & Ian Martin, 2009. "Disasters implied by equity index options," NBER Working Papers 15240, National Bureau of Economic Research, Inc.
- David Backus & Mikhail Chernov & Ian Martin, 2009. "Disasters Implied by Equity Index Options," Working Papers 09-14, New York University, Leonard N. Stern School of Business, Department of Economics.
- Backus, David & Chernov, Mikhail & Martin, Ian, 2009. "Disasters implied by equity index options," CEPR Discussion Papers 7416, C.E.P.R. Discussion Papers.
- Ian W. Martin, 2013. "Consumption-Based Asset Pricing with Higher Cumulants," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 745-773.
- Ian Martin, 2010. "Consumption-Based Asset Pricing with Higher Cumulants," NBER Working Papers 16153, National Bureau of Economic Research, Inc.
- Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December. Full references (including those not matched with items on IDEAS)