In this paper, we develop a framework for valuing real options and portfolios of real options in incomplete markets and show that it is a consistent generalization of contingent claims analysis, which is conventionally used for real option valuation in complete markets. The development of a framework for incomplete markets is motivated by the difficulty to construct replicating portfolios in pr...

We analyze the risk characteristics and the valuation of assets in an economy in which the investment opportunity set is described by the real interest rate and the maximum Sharpe ratio. It is shown that, holding constant the beta of the underlying cash flow, the beta of a security is a function of the maturity of the cash flow. For parameter values estimated from U.S. data, the security beta i...

The valuation of French Canadian paintings is analyzed empirically. Using a sample of auction prices for major French Canadian painters for the period 1968-2005, we run hedonic regressions to analyze the influence of various factors, including painter identity, on auction prices, as well as to construct a market price index. This index is used in a second stage analysis in which we analyze the ...

This work leans more towards the analytical side, focusing on providing a detailed discussion and derivation of the process that leads to the above-mentioned curves. Before going any further, it would be helpful to touch on some of the relevant works and their relation to our objectives. There are at least two issues that surround the WACC and/or the WACC curve. Firstly, how accurately can the ...

Testing CAPM with a Large Number of Assets This paper is concerned with testing the time series implications of the capital asset pricing model (CAPM) due to Sharpe (1964) and Lintner (1965), when the number of securities, N, is large relative to the time dimension, T, of the return series. In the case of cross-sectionally correlated errors, using a threshold estimator of the average squares of...

he covariance matrix of asset returns is important for a wide range of individuals.1 Academics use estimates of the covariance matrix to test asset-pricing theories. Portfolio managers use the covariance matrix in designing tracking strategies where the return on their portfolio is designed to closely follow the return on a benchmark portfolio. Risk managers use the matrix to construct measures...

We study utility-based pricing systems for options written on a nontraded asset in the presence of a correlated traded asset. We develop and analyse a concept of the term structure of risk aversion which unables us to consider options of di¤erent maturities in a way which is consistent with the present value calculations. In our framework European options of di¤erent maturities are priced relat...

What determined the volatility of asset prices in Germany between the wars? This paper argues that the influence of political factors has been overstated. The majority of events increasing political uncertainty had little or no effect on the value of German assets and the volatility of returns on them. Instead, it was inflation (and the fear of it) that is largely responsible for most of the va...

We present a dynamical theory of asset price bubbles that exhibits the appearance of bubbles and their subsequent crashes. We show that when speculative trends dominate over fundamental beliefs, bubbles form, leading to the growth of asset prices away from their fundamental value. This growth makes the system increasingly susceptible to any exogenous shock, thus eventually precipitating a crash...

We derive a parsimonious returns-based stochastic discount factor that is robust to model misspecification. We consider a general equilibrium model with heterogeneous agents who can invest their wealth in many assets. As long as (i) agents have (individual-, time-, and state-dependent) recursive preferences that are homothetic in current consumption and continuation value with a common relative...