Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-10T18:11:08.154Z Has data issue: false hasContentIssue false
  • English
  • Français

The Multi-Period CAPM and the Valuation of Multi-Period Stochastic Cash Flows

Published online by Cambridge University Press:  06 April 2009

Hossein B. Kazemi
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper develops a valuation formula for multi-period stochastic cash flows consistent with rational risk-averse investor behavior and equilibrium in securities markets. It shows that the CAPM does not have to be sequentially applied in discounting of the cash flows of multi-period projects, and a single beta can be used to measure the riskiness of an uncertain income stream. Hence, a multi-period project is priced as if it offers a single payment. The formula uses a set of assumptions that is slightly more restrictive than the minimum set Constantinides (1980) uses to produce the multi-period version of the CAPM. This paper also demonstrates that, under certain assumptions, covariances of stochastic cash flows with changes in the term structure may be sufficient measures of the cash flows' riskiness.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 2 , June 1991 , pp. 223 - 231
Copyright
Copyright © School of Business Administration, University of Washington 1991

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bogue, M. C., and Roll, R.. “Capital Budgeting of Risky Projects with ‘Imperfect’ Markets for Physical Capital.” In Risk and Return in Finance, Friend, I. and Bicksler, J., editors. New York: Heath Lexington (1974).Google Scholar
Breeden, D. T. “Allocational Roles of Options on Bonds.” Unpubl. Working Paper, Graduate School of Business, Stanford Univ. (1983).Google Scholar
Breeden, D. T. “Consumption, Production, Inflation, and Interest Rates: A Synthesis.” Journal of Financial Economics, 16 (03 1986), 3–40.CrossRefGoogle Scholar
Constantinides, G. M. “Admissible Uncertainty in the Intertemporal Asset Pricing Model.” Journal of Financial Economics, 8 (03 1980), 71–86.CrossRefGoogle Scholar
Constantinides, G. M. “Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation.” Journal of Business, 55 (04 1982), 253–267.Google Scholar
Constantinides, G. M. “Theory of Valuation: Overview and Recent Developments.” In Frontiers of Financial Theory: Theory of Valuation, Constantinides, and Bhattacharya, , editors. Totowa, NJ: Rownman and Littlefield (1989).Google Scholar
Cox, J.; Ingersoll, J.; and Ross, S. A.. “A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (03 1985), 385–408.CrossRefGoogle Scholar
Fama, E. F. “Risk-Adjusted Discount Rates and Capital Budgeting under Uncertainty.” Journal of Financial Economics, 5 (08 1977), 3–24.CrossRefGoogle Scholar
Harrison, M., and Kreps, D.. “Martingales and Arbitrage in Multiperiod Securities Markets. Journal of Economic Theory, 20 (12 1979), 381–408.Google Scholar
Kazemi, H., and Milonas, N.. “Return Generating Processes of Long-term Bonds and Measurement of Risk: Theory and Empirical Evidence.” Unpubl. Working Paper, School of Management, Univ. of Massachusetts (1990).Google Scholar
Lucas, R. “Asset Prices in an Exchange Economy.” Econometrica, 46 (11 1978), 1429–1445.CrossRefGoogle Scholar
Mehra, R., and Prescott, E. C.. “The Equity Premium: A Puzzle.” Journal of Monetary Economics, 15 (03 1985), 145–161.CrossRefGoogle Scholar
Prescott, E. C., and Mehra, R.. “Recursive Competitive Equilibrium: The Case of Homogeneous Households.” Econometrica, 48 (09 1980), 1365–1379.CrossRefGoogle Scholar
Ross, S. A. “A Simple Approach to the Valuation of Uncertain Income Stream.” Journal of Business, 51 (07 1978), 453–475.CrossRefGoogle Scholar
Rubinstein, M. “The Valuation of Uncertain Income Streams and the Pricing of Options.” Bell Journal of Economics and Management Science, 7 (Autumn 1976), 407–425.Google Scholar
Sundaresan, S. “Constant Absolute Risk Aversion Preferences and Constant Equilibrium Riskless Rate.” Journal of Finance, 38 (03 1983), 205–212.CrossRefGoogle Scholar