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Sensitivity analysis of long-term cash flows

Hyungbin Park ()
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Hyungbin Park: Seoul National University

Finance and Stochastics, 2018, vol. 22, issue 4, 773-825

Abstract: Abstract This paper conducts a sensitivity analysis of long-term cash flows. The price of the cash flow at time zero is given by the pricing operator of a Markov diffusion acting on the cash flow function. We study the extent to which the price of the cash flow is affected by small perturbations of the underlying Markov diffusion. The main tool is the Hansen–Scheinkman decomposition, which is a method to express the cash flow in terms of eigenvalues and eigenfunctions of the pricing operator. By incorporating techniques developed by Fournié et al. (Finance Stoch. 3:391–412, 1999), the sensitivities of long-term cash flows can be represented via simple expressions in terms of eigenvalues and eigenfunctions.

Keywords: Long-term cash flows; Hansen–Scheinkman decomposition; Sensitivity analysis; 60J70; 91G20 (search for similar items in EconPapers)
JEL-codes: C52 G13 (search for similar items in EconPapers)
Date: 2018
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