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Money-metric valuation of assets

Author

Listed:
  • Sudhir A. Shah

    (Department of Economics, Delhi School of Economics)

Abstract

We propose an asset’s money-metric value as the appropriate representation of its subjective value to an investor. This value is expressed in monetary terms and is invariant across equivalent utility representations of the investor’s preference. The ordering of money-metric values across assets matches the investor’s preference ordering over the assets.The money-metric value of a risky asset is inversely related to the investor’s risk aversion, while the money-metric value of a risk-free asset is uniform across preferences with comparable risk-aversion. Finally, an asset’s arbitrage-free market price is the sum of its money-metric value and the investor’s willingness-to-pay for fully de-risking the asset. JEL Code: G11, G12

Suggested Citation

  • Sudhir A. Shah, 2024. "Money-metric valuation of assets," Working papers 347, Centre for Development Economics, Delhi School of Economics.
    • Handle: RePEc:cde:cdewps:347
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    File URL: http://www.cdedse.org/pdf/work347.pdf
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    References listed on IDEAS

    as
    1. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    2. Merton, Robert C., 1977. "On the pricing of contingent claims and the Modigliani-Miller theorem," Journal of Financial Economics, Elsevier, vol. 5(2), pages 241-249, November.
    3. Kreps, David M., 1981. "Arbitrage and equilibrium in economies with infinitely many commodities," Journal of Mathematical Economics, Elsevier, vol. 8(1), pages 15-35, March.
    4. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    5. Yaari, Menahem E., 1969. "Some remarks on measures of risk aversion and on their uses," Journal of Economic Theory, Elsevier, vol. 1(3), pages 315-329, October.
    6. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Shah, Sudhir A., 2017. "How risky is a random process?," Journal of Mathematical Economics, Elsevier, vol. 72(C), pages 70-81.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    money-metric asset valuation; arbitrage-free prices; risk aversion;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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