Valuing streams of risky cashflows with risk-value models

Abstract

Based on risk-value models we introduce a multi-period approach to the valuation of streams of risky cash flows. The valuation is based on the (expected) value of the output's or input's magnitude and the risk of the output cash flow, as captured by a risk measure. We derive three formulae for valuing single cash flows and utilize the principles of separate valuation and of cumulating the cash flows to derive a multi-period valuation method. In an axiomatic way, the article sets the foundations for a new approach and suggests several directions for its further development.

On the use of the terminal-value approach in risk-value models

“…Summarizing, the concept of terminal value can in principal be used in risk value models, but only with certain caveats and limitations. This paper therefore marks a significant progress compared with the original framework of Dorfleitner and Gleißner (2018), in which a final cash flow at some period is required. Generally, it should be noted that as in usual DCF models the value of the stream of cash flows is very sensitive to the specification of the growth rate (Friedl and Schwetzler 2011).…”

“…Practically, in the specification of Dorfleitner and Gleißner (2018), λ I t exceeds every bound for t → ∞. Therefore it is sensible to assume that there is some latest period t * , after which x (t)…”

“…. Note that the problem does not occur in the work of Dorfleitner and Gleißner (2018) as there the number of cash flows to be valued is finite.…”

“…The proof has already been provided by Dorfleitner and Gleißner (2018). If we specify the risk measure ρ to be the (PI) standard deviation, then λ t , according to (24), can be expressed as:…”

Enhanced Cash Flow Valuation in Real Estate Management by Integrating Innovative Materials and Risk Assessment

“…As a result, the accumulated stochastic discounted value of all cash flows is valued using with a one-period model. The model is based on previous work by Gleißner [63] and Dorfleitner and Gleißner [64]. However, in this paper, the model was developed further and included environmental and long-term risks.…”