Journal of Risk

Risk.net

Valuing streams of risky cashflows with risk-value models

Gregor Dorfleitner and Werner Gleißner

  • The authors introduce a new valuation approach for projects and firms.
  • The approach is based on imperfect replication and uses risk measures.
  • While the basic setting is a one-period model, the authors also extend it to many periods.
  • The approach can be applied especially for SMEs.

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

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