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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- Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, September.
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