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Valuing the Future and Discounting in Random Environments: A Review.

Jaume Masoliver1,2, Miquel Montero1,2, Josep Perelló1,2

  • 1Departament de Física de la Matèria Condensada, Universitat de Barcelona, 08028 Barcelona, Spain.

Entropy (Basel, Switzerland)
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Summary
This summary is machine-generated.

This study explores economic discounting in random environments, reviewing stochastic market dynamics and the Feynman-Kac approach. It clarifies the relationship between bond pricing and discounting, introducing key financial concepts for economic valuation.

Keywords:
bond pricingdiscountingeconophysicsreal interest rates

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Area of Science:

  • Finance and Economics
  • Quantitative Finance
  • Mathematical Finance

Background:

  • Discounting is crucial for valuing future outcomes in economic and financial contexts.
  • Stochastic market dynamics and continuous-time models are essential for accurate economic valuation.
  • Understanding the market price of risk and risk-neutral measures is key to financial modeling.

Purpose of the Study:

  • To review and synthesize various approaches to economic discounting in random environments.
  • To elucidate the connection between bond-pricing theory and discounting methodologies.
  • To provide an intuitive understanding of the market price of risk and risk-neutral measures.

Main Methods:

  • Review of established stochastic market dynamics in continuous time.
  • Inclusion of the Feynman-Kac approach for financial modeling.
  • Conceptual introduction to market price of risk and risk-neutral measures.

Main Results:

  • The study provides specific discount rates for various economic models.
  • Key results and implications of different discounting approaches are discussed.
  • Empirical findings from long-run discount studies across multiple countries are summarized.

Conclusions:

  • Discounting in random environments requires understanding complex stochastic processes.
  • The Feynman-Kac approach offers a valuable framework for continuous-time financial modeling.
  • Empirical evidence supports the analysis of long-run discounting trends in national economies.