Abstract
The present value relation says that, under certainty, the value of a capital good or financial asset equals the summed discounted value of the stream of revenues which that asset generates. Otherwise arbitrage would be possible. Under uncertainty, and if risk neutrality is assumed, the future payoffs are replaced by their conditional expectations. Under risk aversion either the natural probability measure under which expectations are taken must be replaced by a ‘risk-neutral measure’, or the discount factor must be modified by a factor that reflects risk. The present value relation leads to bubbles if a convergence condition is not satisfied.
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LeRoy, S.F. (2018). Present Value. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_1387
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DOI: https://doi.org/10.1057/978-1-349-95189-5_1387
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