 ON THE CONSISTENCY OF THE LUCAS PRICING FORMULAMathematical Finance, 2008, vol. 18, issue 2, 293-303 Abstract: In order to find the real market value of an asset in an exchange economy, one would typically apply the Lucas formula, developed in a discrete time framework. This theory has also been extended to continuous time models, in which case the same pricing formula has been universally applied. While the discrete time theory is rather transparent, there has been some confusion regarding the continuous time analogue. In particular, the continuous time pricing formula must contain a certain type of a square covariance term that does not readily follow from the discrete time formulation. As a result, this term has sometimes been missing in situations where it should have been included. In this paper, we reformulate the discrete time theory in such a way that this covariance term does not come as a mystery in the continuous time version. In most real life situations dividends are paid out in lump sums, not in rates. This leads to a discontinuous model, and adding a continuous time framework, it appears that our framework is a most natural one in finance. Finally, the Gordon growth formula is extended from its deterministic origin, to the present model of uncertainty, and it is indicated how this can be used to to possibly shed some light on the volatility puzzle. Date: 2008 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:18:y:2008:i:2:p:293-303 Ordering information: This journal article can be ordered from Access Statistics for this article Mathematical Finance is currently edited by Jerome Detemple More articles in Mathematical Finance from Wiley Blackwell |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.