Asset pricing with uncertain betas: A long-term perspective

Gollier, Christian (2012) Asset pricing with uncertain betas: A long-term perspective. TSE Working Paper, n. 12-354

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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.

Item Type: Monograph (Working Paper)
Date: November 2012
Uncontrolled Keywords: asset prices, term structure, risk premium, certainty equivalent beta
JEL codes: E43 - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Financial Markets and the Macroeconomy
G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading volume; Bond Interest Rates
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Jul 2014 17:31
Last Modified: 07 Mar 2018 13:22

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