Asset pricing with uncertain betas: A long-term perspective

Christian Gollier ()

No 752, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: How should one evaluate investment projects whose CCAPM betas are uncertain? This question is particularly crucial for projects yielding long-lasting impacts on the economy, as is the case for example for many green investment projects. We defined the notion of a certainty equivalent beta. We characterize it as a function of the characteristics of the uncertainties affecting the asset’s beta and the economy as a whole. We show that its term structure is not constant and that, for short maturities, it equals the expected beta. If the expected beta is larger than a threshold (which is negative and large in absolute value in all realistic calibrations), the term structure of the certainty equivalent beta is increasing and tends to its largest plausible value. In the benchmark case in which the asset’s beta is normally distributed, the certainty equivalent beta becomes infinite for finite maturities.

Keywords: asset prices; term structure; risk premium; certainty equivalent beta (search for similar items in EconPapers)
JEL-codes: E43 G11 G12 Q54 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-mac and nep-ppm
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Working Paper: Asset Pricing with Uncertain Betas: A Long-Term Perspective (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ide:wpaper:26544

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