In this paper we present an efficient methodology for approximating the distribution function of the net present value of a series of cash-flows, when the discounting is presented by a stochastic differential equation as in the Vasicek model and in the Ho-Lee model. Upper and lower bounds in convexity order are obtained. The high accuracy of the method is illustrated for cash-flows for which no...

A similar negative correlation between inflation and stock prices prompted Modigliani and Cohn to conjecture that investors are prone to money illusion: they confuse nominal and real interest rates. When that is the case investors mistakenly discount real future cash flows with the nominal interest rate (or alternatively ignore the fact that cash flows tend to grow in nominal terms as inflation...

We consider a competitive and perfect financial market in which agents have heterogeneous cash flow valuations. Instead of assuming that agents are endowed with rational expectations, we model their behavior as the product of adaptive learning. Our results demonstrate that adaptive learning affects security design profoundly, with securities mispriced even in the long run and optimal designs tr...

In order to apply asset-liabilitymanagement techniques to property-liability insurers, the sensitivity of liabilities to interest rate changes, or duration, must be calculated. The current approach is to use the Macaulay or modified duration calculations, both of which presume that the cash flows are invariant with respect to interest rate changes. Based on the structure of liabilities for prop...

This paper examines if markets populated by short-horizon investors tend to have the prices come unhooked from their fundamental values or cash flows. For prices to be near the fundamental value in a market populated with short-horizon investors, the investors must induct backward from future cash flows to the present values. We argue that investors’ ability to backward induct depends criticall...

Casella for invaluable guidance during my program. I would also like to thank Professors Peter Wilson, Vic Bernard and Tom Stober for their willingness to answer questions and offer advice. Financial support from the Arthur Andersen Foundation, the Social Sciences and Humanities Research Council of Canada, and the UW/SSHRC grant program during various stages of this work was greatly appreciated...

This paper presents the economic ordering policies of time-dependent deteriorating items in presence of trade credit using of discounted cash-flows (DCF) approach. In inventory analysis a DCF approach permits a proper recognition of the financial implication of the opportunity cost and out-of-pocket cost. In the inventory model, shortages are not allowed. In this study mathematical models are a...

The cash flows of technology-based companies show high degrees of uncertainty. As traditional valuation methods can hardly capture these characteristics, they are insufficient for valuing these kinds of companies. On the contrary, real options theory can quantify the value associated with management flexibility, growth opportunities, and synergies. This chapter assesses the corporate value of a...

A fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows, indicating an inherent negative correlation between accruals and cash flows. We show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years. The adjusted R 2 from ...

We present a new model of asset prices in which representative agent has extrapolative beliefs about stock market returns and Epstein-Zin preferences. The quantitatively explains facts prices, return expectations, cash-flow expectations. When the agent’s are calibrated to survey expectations investors, generates excess volatility predictability returns, high equity premium, low stable risk-free...