present value

Stephen F. LeRoy
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
Alternate versions available: 1987 Edition
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Abstract

The present value relation says that, under certainty, the value of a capital good or financial asset equals the summed discounted value of the stream of revenues which that asset generates. Otherwise arbitrage would be possible. Under uncertainty, and if risk neutrality is assumed, the future payoffs are replaced by their conditional expectations. Under risk aversion either the natural probability measure under which expectations are taken must be replaced by a ‘risk-neutral measure’, or the discount factor must be modified by a factor that reflects risk. The present value relation leads to bubbles if a convergence condition is not satisfied.
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How to cite this article

LeRoy, Stephen F. "present value." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 24 October 2017 <http://www.dictionaryofeconomics.com/article?id=pde2008_P000158> doi:10.1057/9780230226203.1334

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