2010/01/08 by Constantinos Kardaras, Kardaras, Constantinos · 2 citations
Economics, Econometrics and Finance · #Actuarial science #Asset (computer security) #Capital Investment and Risk Analysis #Capital asset pricing model #Computer science #Discounting #Econometrics #Economics #FOS: Economics and business #Finance #Financial Markets and Investment Strategies #Mathematical economics #Microeconomics #Pricing of Securities (q-fin.PR) #Stochastic discount factor #Stochastic game #Stochastic processes and financial applications #Valuation (finance) #q-fin.PR
paper · pdf · doi:10.48550/arxiv.1001.1184
published in RePEc: Research Papers in Economics (Federal Reserve Bank of St. Louis) · 12 pages. To appear in the "Encyclopedia of Quantitative Finance"
arxiv created 2010/01/08 · openalex publication_date 2010/01/08 · arxiv updated 2010/01/14 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05
The valuation process that economic agents undergo for investments with uncertain payoff typically depends on their statistical views on possible future outcomes, their attitudes toward risk, and, of course, the payoff structure itself. Yields vary across different investment opportunities and their interrelations are difficult to explain. For the same agent, a different discounting factor has to be used for every separate valuation occasion. If, however, one is ready to accept discounting that varies randomly with the possible outcomes, and therefore accepts the concept of a stochastic discount factor, then an economically consistent theory can be developed. Asset valuation becomes a matter of randomly discounting payoffs under different states of nature and weighing them according to the agent's probability structure. The advantages of this approach are obvious, since a single discounting mechanism suffices to describe how any asset is priced by the agent.