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Stochastic Compounding and Uncertain Valuation

Author

Listed:
  • Lars P. Hansen

    (University of Chicago and NBER)

  • Jose A. Scheinkman

    (Princeton University and NBER)

Abstract

Exploring long-term implications of valuation leads us to recover and use a distorted probability measure that reflects the long-term implications for risk pricing. Formally, we apply a generalized version of Perron-Frobenius theory to construct this probability measure. We discuss methods for recovering this distribution from financial market data; we apply this distribution to characterize the impact of model misspeciffcation; and we apply it to study Kreps-Porteus style utility recursions for infinite horizon economies.

Suggested Citation

  • Lars P. Hansen & Jose A. Scheinkman, 2013. "Stochastic Compounding and Uncertain Valuation," Working Papers 1459, Princeton University, Department of Economics, Econometric Research Program..
    • Handle: RePEc:pri:metric:wp051_2013_hansen_scheinkman_stochastic-compounding-and-uncertain-valuation.pdf
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    File URL: http://detc.princeton.edu/wp-content/uploads/2016/11/wp051_2013-revised_Hansen_Scheinkman_Stochastic-Compounding-and-Uncertain-Valuation.pdf
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    More about this item

    Keywords

    Perron-Frobenius theory; probability; Kreps-Porteus style utility recursions;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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