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Evaluation of long-dated assets: The role of parameter uncertainty

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  • Gollier, Christian
Abstract
Under expected utility, the uncertainty that affects the parameters of the random walk of consumption growth has no effect on the value of short-term claims and makes the term structure of risk-free rates decreasing. The term structure of aggregate risk premia is increasing when the uncertain cumulants of log consumption are independent. We apply these generic results to the case of an uncertain probability of catastrophes, and to the case of an uncertain trend or volatility of growth. Adding some persistence to unobservable shocks into our benchmark model, we show that the term structure of risk premia is hump-shaped.

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  • Gollier, Christian, 2016. "Evaluation of long-dated assets: The role of parameter uncertainty," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 66-83.
    • Handle: RePEc:eee:moneco:v:84:y:2016:i:c:p:66-83
    DOI: 10.1016/j.jmoneco.2016.10.007
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    Cited by:

    1. Gluzberg, Victor E. & Katz, Yuri A., 2019. "Planetary boundaries of consumption growth: Declining social discount rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 521(C), pages 362-374.
    2. Gollier, Christian, 2012. "A theory of rational short-termism with uncertain betas," LERNA Working Papers 12.14.371, LERNA, University of Toulouse.
    3. Freeman, Mark C. & Wagner, Gernot & Zeckhauser, Richard J., 2015. "Climate Sensitivity Uncertainty: When Is Good News Bad?," Working Paper Series rwp15-002, Harvard University, John F. Kennedy School of Government.
    4. Gourieroux, Christian & Jasiak, Joann, 2010. "Inference for Noisy Long Run Component Process," MPRA Paper 98987, University Library of Munich, Germany.
    5. Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2016. "No‐Bubble Condition: Model‐Free Tests in Housing Markets," Econometrica, Econometric Society, vol. 84, pages 1047-1091, May.
    6. Christian Gollier & Miles S. Kimball, 2018. "Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(2), pages 397-430, June.
    7. Wang, Brian Yutao & Li, Shuo & Liu, Guangqiang & Yang, Zhiqing, 2021. "Running out of energy: The Price effect of energy deficiency," Energy Economics, Elsevier, vol. 100(C).
    8. Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2014. "Very long-run discount rates," Globalization Institute Working Papers 182, Federal Reserve Bank of Dallas.
    9. Gollier, Christian & van der Ploeg, Frederick & Zheng, Jiakun, 2023. "The discounting premium puzzle: Survey evidence from professional economists," Journal of Environmental Economics and Management, Elsevier, vol. 122(C).
    10. repec:avg:wpaper:en11709 is not listed on IDEAS
    11. Christian Gollier, 2019. "A Personal Biography of Marty Weitzman," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 943-947, November.
    12. Barrage, Lint, 2018. "Be careful what you calibrate for: Social discounting in general equilibrium," Journal of Public Economics, Elsevier, vol. 160(C), pages 33-49.
    13. Barahona, Ricardo & Driessen, Joost & Frehen, Rik, 2021. "Can unpredictable risk exposure be priced?," Journal of Financial Economics, Elsevier, vol. 139(2), pages 522-544.
    14. Gollier, Christian, 2012. "Asset pricing with uncertain betas: A long-term perspective," TSE Working Papers 12-354, Toulouse School of Economics (TSE).
    15. Luo, Lanlan & Zou, Ziran & Chen, Shou, 2021. "Discounting for public-private partnership projects in China," Economic Modelling, Elsevier, vol. 98(C), pages 218-226.
    16. Kathrin Goldmann, 2019. "Time-declining risk-adjusted social discount rates for transport infrastructure planning," Transportation, Springer, vol. 46(1), pages 17-34, February.
    17. Frédéric CHERBONNIER & Ulrich HEGE, 2020. "Risques climatiques et règlementation financière prudentielle," Working Paper b08f5c14-94fc-4ccc-b857-6, Agence française de développement.
    18. Richard Kihlstrom & Christian Gollier, 2016. "Early resolution of uncertainty and asset prices," 2016 Meeting Papers 475, Society for Economic Dynamics.
    19. William J. Luther, 2021. "Two paths forward for Austrian macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 289-297, June.
    20. Corneo, Giacomo, 2015. "Volkswirtschaftliche Bewertung öffentlicher Investitionen," Discussion Papers 2015/12, Free University Berlin, School of Business & Economics.
    21. Gertsman, Gleb & Frehen, Rik & Werker, Bas J.M., 2019. "Would Ambiguity Averse Investors Hedge Risk in Equity Markets?," Other publications TiSEM bd3eb3e5-517e-40d4-aab9-e, Tilburg University, School of Economics and Management.
    22. Rob Aalbers, 2013. "Optimal Discount Rates for Investments in Mitigation and Adaptation," CPB Discussion Paper 257, CPB Netherlands Bureau for Economic Policy Analysis.

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    More about this item

    Keywords

    Term structure; Decreasing discount rates; Deep uncertainty; Rare events; Long-run risk;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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