Valuing the Future and Discounting in Random Environments: A Review

Abstract:

We address the process of discounting in random environments, which allows valuation of the future in economic terms. We review several approaches to the problem regarding different well-established stochastic market dynamics in the continuous-time context and include the Feynman–Kac approach. We also review the relation between bond-pricing theory and discounting and introduce both the market price of risk and the risk neutral measure from an intuitive point of view devoid of excessive formalism. We provide the discount for each economic model and discuss their key results. We finally present a summary of our previous empirical studies for several countries on the long-run discount problem.