Asset-backed stable numeraire approach for sustainable valuation

Date

2020-05-01

Author

Aydin, Nadi Serhan
Rainer, Martin

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Interest rates underpin almost every instrument/transaction in conventional financial markets. Valuation of the instruments in relation to interest rates remains meaningful only ifcashcan be attributed a worth of its own (which is generally assumed to accumulate over time). The relevant concepts such as the stochastic short rate and the conventional numeraire (i.e. the money market account) not only become restrictive when one attempts to build more realistic models in quantitative finance, but also - as we demonstrate in this work - their application has de-stabilizing effects on asset valuations. This paper presents a detailed critique of the conventional numeraire and proposes an asset-backed stable numeraire for sustainable valuation of assets and/or transactions. In particular, we demonstrate how some of the key benchmarks of a sustainable footprint may be used as a numeraire currency. We also unveil the implicit assumption underlying the common practice of straightforward factorization in conventional relative pricing to be false.

Subject Keywords

Asset-backed numeraire, Interest-rate benchmarks, Fair valuation, Conventional pricing, Risk-neutral valuation

URI

https://hdl.handle.net/11511/65944

Journal

JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT

DOI

https://doi.org/10.1080/20430795.2020.1769983

Collections

Graduate School of Applied Mathematics, Article

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Citation Formats

N. S. Aydin and M. Rainer, “Asset-backed stable numeraire approach for sustainable valuation,” JOURNAL OF SUSTAINABLE FINANCE & INVESTMENT, pp. 0–0, 2020, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/65944.