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Publisher Summary This chapter presents the key principles and elements of modern valuation theory, which is the basis of modern pricing, risk, and performance models. It demonstrates how modern valuation theory allows for building valuation models for virtually any instrument from a manageable set of atomic valuation building blocks described in the approach. Asset pricing is about finding an appropriate value, or a “price” for a financial instrument, an asset. One uses the term valuation theory instead of “asset pricing theory” as it is more generic and points more in the direction of what the theory actually does. The theory gives an economic rationale for the valuation model, so one can justify the results in front of peers, superiors or clients. Giving an economic rational necessarily means working with an economic model, which, in turn, implies the usage of assumptions and simplifications. |
