Analysis of correlated risky cash flow

In the analysis of a single cash-flow profile under risk, between-period dependency among cash flows raises considerable difficulty in the evaluation of the profile's net present value. It is assumed in this paper that the cash-flow profile exhibits a first-order autoregressive time-series stru...

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Bibliographic Details
Published in:International journal of production economics 1993-11, Vol.32 (3), p.269-276
Main Authors: Hui, Y.V., Leung, L.C., Huang, J.S.
Format: Article
Language:English
Subjects:
Applied sciences
Cash flow
Economic models
Exact sciences and technology
Net present value
Operational research and scientific management
Operational research. Management science
Portfolio theory
Studies
Time series
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Summary:In the analysis of a single cash-flow profile under risk, between-period dependency among cash flows raises considerable difficulty in the evaluation of the profile's net present value. It is assumed in this paper that the cash-flow profile exhibits a first-order autoregressive time-series structure, with the trend of the AR(1) process being a deterministic AR(1) in itself. The relevant parameters, however, are unknown. It is also assumed that the estimates of the cash-flow in every period are available. Applying an “error-in-variable” analysis on the estimates, the relevant parameters of the time-series model are derived. This then allows the mean and variance of the profile's NPV to be subsequently evaluated.
ISSN:0925-5273
1873-7579
DOI:10.1016/0925-5273(93)90040-R