An axiomatic approach to the valuation of cash flows

Fredrik Armerin

Scandinavian Actuarial Journal, 2014, vol. 2014, issue 1, 32-40

Abstract: We model a stream of cash flows as an optional stochastic process, and value the cash flows by using a continuous and strictly positive linear functional. By applying a representation theorem from the general theory of stochastic processes we are able to study this valuation principle, as well as properties of the stochastic discount factor it implies. This approach to valuation is useful in the non-presence of a financial market, as is often the case when valuing cash flows arising from insurance contracts and in the application of real options.

Date: 2014
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DOI: 10.1080/03461238.2011.628408

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