Handbook of the Economics of Finance

Chapter 23

Risk Pricing over Alternative Investment Horizons ^*

Lars Peter Hansen

Departments of Economics and Statistics, University of Chicago, Chicago, Illinois, USA and the NBER

Abstract

I explore methods that characterize model-based valuation of stochastically growing cash flows. Following previous research, I use stochastic discount factors as a convenient device to depict asset values. I extend that literature by focusing on the impact of compounding these discount factors over alternative investment horizons. In modeling cash flows, I also incorporate stochastic growth factors. I explore dynamic value decomposition (DVD) methods that capture concurrent compounding of a stochastic growth and discount factors in determining risk-adjusted values. ...