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Asset pricing with uncertain betas: A long-term perspective

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  • Gollier, Christian

Abstract

How should one evaluate investment projects whose CCAPM betas are uncertain? This question is particularly crucial for projects yielding long-lasting impacts on the economy, as is the case for example for many green investment projects. We defined the notion of a certainty equivalent beta. We characterize it as a function of the characteristics of the uncertainties affecting the asset’s beta and the economy as a whole. We show that its term structure is not constant and that, for short maturities, it equals the expected beta. If the expected beta is larger than a threshold (which is negative and large in absolute value in all realistic calibrations), the term structure of the certainty equivalent beta is increasing and tends to its largest plausible value. In the benchmark case in which the asset’s beta is normally distributed, the certainty equivalent beta becomes infinite for finite maturities.

Suggested Citation

  • Gollier, Christian, 2012. "Asset pricing with uncertain betas: A long-term perspective," TSE Working Papers 12-354, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:26543
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    References listed on IDEAS

    as
    1. Christian Gollier, 2012. "Evaluation of Long-Dated Investments under Uncertain Growth Trend, Volatility and Catastrophes," CESifo Working Paper Series 4052, CESifo.
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    6. Philipp Krüger & Augustin Landier & David Thesmar, 2015. "The WACC Fallacy: The Real Effects of Using a Unique Discount Rate," Journal of Finance, American Finance Association, vol. 70(3), pages 1253-1285, 06.
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    Cited by:

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    2. Katz, Yuri A., 2017. "Value of the distant future: Model-independent results," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 269-276.

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    More about this item

    Keywords

    asset prices; term structure; risk premium; certainty equivalent beta;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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