Stochastic Compounding and Uncertain Valuation

Lars Hansen and Jose Scheinkman

No 1459, Working Papers from Princeton University, Department of Economics, Econometric Research Program.

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.

Keywords: Perron-Frobenius theory; probability; Kreps-Porteus style utility recursions (search for similar items in EconPapers)
JEL-codes: C01 C70 D03 D63 (search for similar items in EconPapers)
Date: 2013-04
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