Department of Finance and Business Economics, University of Southern California. I thank Daniel Siegel and especially Bob McDonald for insightful and comprehensive comments. Residual errors remain my own responsibility. I gratefully acknowledge research support from the State Farm Companies Foundation.
The Equilibrium Valuation of Risky Discrete Cash Flows in Continuous Time
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 5, pages 1373–1383, December 1989
How to Cite
SHIMKO, D. C. (1989), The Equilibrium Valuation of Risky Discrete Cash Flows in Continuous Time. The Journal of Finance, 44: 1373–1383. doi: 10.1111/j.1540-6261.1989.tb02659.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper values a contingent claim to discrete stochastic cash flows generated by a Poisson arrival process with a randomly varying intensity parameter. In the most general case, both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy. Assuming the conditions of an intertemporal capital aset pricing model, solutions for the value of the contingent claim can be found using various techniques. The paper suggests immediate applications to the valuation of insurance contracts, the decision to build a firm with unknown future investment opportunities, and the pricing of mortgage-backed securities.