Title

Stochastic Compounding and Uncertain Valuation

Author(s)

Lars P. Hansen Lars Hansen (University of Chicago and NBER)

Jose A. Scheinkman Jose 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.

Creation Date

2013-04

Section URL ID

ET

Paper Number

wp051_2013_Hansen_Scheinkman_Stochastic-Compounding-and-Uncertain-Valuation.pdf

URL

http://detc.princeton.edu/wp-content/uploads/2016/11/wp051_2013-revised_Hansen_Scheinkman_Stochastic-Compounding-and-Uncertain-Valuation.pdf

File Function

Jel

C010, C700, D030, D630

Keyword(s)

Perron-Frobenius theory, probability, Kreps-Porteus style utility recursions

Suppress

false

Series

10