The Valuation of Long-Dated Assets
The expected time- and risk-adjusted cumulative return on any asset equals one at all horizons. Nonetheless, I show that a typical asset's realized time- and risk-adjusted cumulative return tends to zero almost surely. As a corollary, the value of a typical long-dated asset is driven by extreme events: either by good news at the level of the individual asset or by bad news at the aggregate level. In the case of the aggregate market, the fact that its Sharpe ratio is higher than its volatility suggests that bad news is the relevant consideration in practice.
|Date of creation:||Jul 2010|
|Publication status:||published as Ian Martin, 2012. "On the Valuation of Long-Dated Assets," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 346 - 358.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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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.
- Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
- 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.