Gollier, Christian (2012) Evaluation of long-dated assets : The role of parameter uncertainty. TSE Working Paper, n. 12-361, Toulouse

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Abstract

Because of the uncertainty about how to model the growth process of our economy, there is still
much confusion about which discount rates should be used to evaluate actions having long-lasting
impacts, as in the contexts of climate change, social security reforms or large public infrastructures
for example. We characterize efficient discount rates when the growth of log consumption follows
a random walk with uncertain parameters. We examine different models in which the parametric
uncertainty affects the trend and the volatility of growth, or the frequency of catastrophes. This
uncertainty implies that the term structures of the risk free discount rate and of the aggregate risk
premium are respectively decreasing and increasing. It also implies that the discount rate is
increasing with maturity if the beta of the investment is larger than half of relative risk aversion.
Another important consequence of parametric uncertainty is that the risk premium is not
proportional to the beta of the investment. Finally, we apply our findings to the evaluation of
climate change policy. We argue in particular that the beta of actions to mitigate climate change is
relatively large, so that the term structure of the associated discount rates should be increasing.

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• Evaluation of long-dated assets : The role of parameter uncertainty. (deposited 09 Jul 2014 17:31) [Currently Displayed]
  • Evaluation of long-dated assets : The role of parameter uncertainty. (deposited 29 Oct 2016 08:33)