The paper deals with the disputed question in Finance of the inclusion in the discounting interest rate of a risk premium for discounting risky sums. It appears to be a nice and simplifying assumption playing a key role in handling many models. On the other side the theoretical foundations of the procedure are questionable. In any case the receipt is simple: to discount a random amount X one should simply discount its expected value m=E(X) with an interest rate greater than the risk-free one. The majorization should be increasing with the risk, operationally with the variance of X. Our aim is to use the Expected Utility approach in the version incorporating time. We shall see that within this framework one obtains, at least in the first approximation, a decision rule displaying some analogy with the common one.

Discounting risky sums

BECCACECE, FRANCESCA;CIGOLA, MARGHERITA;PECCATI, LORENZO
1995

Abstract

The paper deals with the disputed question in Finance of the inclusion in the discounting interest rate of a risk premium for discounting risky sums. It appears to be a nice and simplifying assumption playing a key role in handling many models. On the other side the theoretical foundations of the procedure are questionable. In any case the receipt is simple: to discount a random amount X one should simply discount its expected value m=E(X) with an interest rate greater than the risk-free one. The majorization should be increasing with the risk, operationally with the variance of X. Our aim is to use the Expected Utility approach in the version incorporating time. We shall see that within this framework one obtains, at least in the first approximation, a decision rule displaying some analogy with the common one.
1995
Beccacece, Francesca; Cigola, Margherita; Peccati, Lorenzo
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3774365
 Attenzione

Attenzione! I dati visualizzati non sono stati sottoposti a validazione da parte dell'ateneo

Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact