The Valuation of Long-Dated Assets

Ian Martin

No 16219, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The expected time- and risk-adjusted cumulative return on any asset equals one at all horizons. Nonetheless, I show that a typical asset's realized time- and risk-adjusted cumulative return tends to zero almost surely. As a corollary, the value of a typical long-dated asset is driven by extreme events: either by good news at the level of the individual asset or by bad news at the aggregate level. In the case of the aggregate market, the fact that its Sharpe ratio is higher than its volatility suggests that bad news is the relevant consideration in practice.

JEL-codes: D53 G1 Q54 (search for similar items in EconPapers)
Date: 2010-07
Note: AP
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Ian Martin, 2012. "On the Valuation of Long-Dated Assets," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 346 - 358.

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Journal Article: On the Valuation of Long-Dated Assets (2012)
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