Abstract
Introduction of the Present Value Distribution Model (PVD) offers an alternative method for the valuation of projects yielding intertemporal stochastic rents. A combination of concepts from many areas of the literature yields the given model. The base procedure relies on Monte Carlo Simulation with the application of recently established theories on stochastic rents, path dependent cash flow trajectories, and period dependent discount rates.
Among the benefits of the (PVD) are exogenous risk discounting and consistent distribution determination. Risk discounting is applied to the resultant of the distribution model rather than within the model. Furthermore, the present value distributions are independent of analyst's perceptions yielding an objective single period gamble.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Black, Fisher. (1972). “Capital Market Equilibrium with Restricted Borrowing,”Journal of Business, (July), 444–454.
Bogue, Marcus C., and Richard Roll. (1974). “Capital Budgeting of Risky Projects with Imperfect Markets for Physical Capital,”Journal of Finance, 29, (May), 601–613.
Boyle, Phelim P. (1977). “Options: A Monte Carlo Approach,”Journal of Financial Economics, 4, 323–338.
Chiang, Raymond, Tsong-Yue Lia, and David C. Ling. (1986). “Retail Leasehold Interest: A Contingent Claim Analysis,”AREUEA Journal, 14, (Spring), 216–229.
Clarke, Harry R., and William J. Reed. (1988). “A Stochastic Analysis of Land Development Timing and Property Valuation,”Regional Science and Urban Economics, 18, 357–183.
Constantinides, George. (1978). “Market Risk Adjustment in Project Valuation,”Journal of Finance, XXXIII, 2, (May), 603–616.
Fama, Eugene F. (1970). “Multiperiod Consumption-Investment Decisions,”American Economic Review, 60, (March), 163–174.
Fama, Eugene F., (1977). “Risk Adjusted Discount Rates and Capital Budgeting Under Uncertainty,”Journal of Financial Economics, 5, 3–24.
Geltner, David. (1989). “Return Risk and Cash Flow Risk with Long-Term Riskless Leases in Commercial Real Estate,” Paper presented at the AREUEA meetings in Atlanta, Georgia, December.
Hertz, David B. (1966). “Risk Analysis in Capital Investment,”Harvard Business Review, LXII (January, February), 95–106.
Hertz, David B. (1968). “Investment Policies That Pay Off,”Harvard Business Review, (January, February), 96–108.
Hirshleifer, J. (1964). “Efficient Allocation of Capital in an UncertainWorld,” American Economic Review, LIV, 3, (May), 77–85.
Jaffe, Austin J. (1980). “A Note on the Use of Capitalization, Discount, and Forward Rates,”The Appraisal Journal, (January), 24–30.
Johnson, Robert W., and Wilbur G. Lewellen. (1972). “Analysis of the Lease-or-Buy Decision,”Journal of Finance, (September), 815–823.
Kassouf, Sheen T. (1966). “Stock Price Random Walks: Some Supporting Evidence,”The Review of Economics and Statistics, 275–278.
Laffont, Jean-Jacques. (1989).The Economics of Uncertainty. MIT Press, Cambridge, Mass.
Lewellen, Wilbur G., Michael S. Long, and John J. McConnell. (1976). “Asset Leasing in Competitive Capital Markets,”Journal of Finance, 3 (June), 787–798.
Lintner, John. (1965). “The Valuation of Risky Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets,”Review of Economics and Statistics, 47, (Feb.), 13–37.
Miller, Merton H., and Charles W. Upton. (1976). “Leasing, Buying, and the Cost of Capital Services,”Journal of Finance, 3, 761–786.
Myers, Stewart C., David A. Dill, and Alberto J. Bautista. (1976). “Valuation of Financial Lease Contracts,”Journal of Finance, 3, 799–819.
Pellatt, Peter G.K. (1972). “The Analysis of Real Estate Investments Under Uncertainty,”The Journal of Finance, 27 (January), 459–471.
Pyhrr, Stephen A. (1973). “A Computer Simulation Model to Measure Risk in Real Estate Investment,”AREUEA Journal, 1, 2 (June), 48–78.
Robichek, Alexander A., and Stewart C. Myers. (1966). “Conceptual Problems in the Use of Risk Adjusted Discount Rates,”The Journal of Finance, 21 (Fall), 727–730.
Samuelson, P.A. (1965). “Rational Theory of Warrant Pricing,”Industrial Management Review, 6, (Spring), 13–32.
Schall, Lawrence D. (1974). “The Lease-or-Buy and Asset Acquisition Decisions,”Journal of Finance, 3, 1203–1214.
Sharpe, William F. (1964). “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,”Journal of Finance, 19, (Sept.), 425–442.
Wofford, Larry E. (1978). “A Simulation Approach to the Appraisal of Income Producing Real Estate,”AREUEA Journal, 6, 370–394.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Hughes, W.T. Risk analysis and asset valution: A Monte Carlo Simulation using stochastic rents. J Real Estate Finan Econ 11, 177–187 (1995). https://doi.org/10.1007/BF01098661
Issue Date:
DOI: https://doi.org/10.1007/BF01098661