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The Economics of Business ValuationTowards a Value Functional Approach$
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Patrick Anderson

Print publication date: 2013

Print ISBN-13: 9780804758307

Published to Stanford Scholarship Online: September 2013

DOI: 10.11126/stanford/9780804758307.001.0001

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MODERN RECURSIVE EQUILIBRIUM AND THE BASIC PRICING EQUATION

MODERN RECURSIVE EQUILIBRIUM AND THE BASIC PRICING EQUATION

Chapter:
(p.113) 9 MODERN RECURSIVE EQUILIBRIUM AND THE BASIC PRICING EQUATION
Source:
The Economics of Business Valuation
Author(s):

Patrick L. Anderson

Publisher:
Stanford University Press
DOI:10.11126/stanford/9780804758307.003.0009

The author introduces the “recursive” model that has emerged within micro-economics over the past few decades. This modern recursive equilibrium model is contrasted with the neoclassical model, in terms of the optimization and time periods involved. The modern, multi-period consumer savings problem is introduced, as well as the “cake eating” problem and basic pricing equation. The author argues these form the basis of a modern microeconomic theory, and that the stochastic discount factor that emerges from the basic pricing equation provides a valuable insight that is lacking in the neoclassical and classical worlds. As with other valuation principles, the author tests the principle as a practical valuation tool for three actual businesses, demonstrating that is provides an incomplete basis for valuation of private firms.

Keywords:   recursive model, value functional equation, cake eating problem, basic pricing equation, stochastic discount factor, Lucas, Sargent, Ljungqvist, Cochrane, Fisher

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