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The Valuation of Uncertain Income Streams and the Pricing of Options
 Mark Rubinstein
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Abstract
A simple formula is developed for the valuation of uncertain income streams consistent with rational investor behavior and equilibrium in financial markets. Applying this formula to the pricing of an option as a function of its associated stock, the Black–Scholes formula is derived even though investors can trade only at discrete points in time.
This paper is reprinted from Bell Journal of Economics, 7 (Autuamn 1976), No. 2, pp. 407–425.
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Inside
Within this Chapter
 Introduction
 Uncertain Income Streams: General Case
 Uncertain Income Streams: Special Case
 Options
 Conclusion
 Appendix 41A The Bivariate Normal Density Function
 References
 References
Other actions
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 Title
 The Valuation of Uncertain Income Streams and the Pricing of Options
 Book Title
 Handbook of Quantitative Finance and Risk Management
 Book Part
 Part III
 Pages
 pp 605616
 Copyright
 2010
 DOI
 10.1007/9780387771175_41
 Print ISBN
 9780387771168
 Online ISBN
 9780387771175
 Publisher
 Springer US
 Copyright Holder
 SpringerVerlag US
 Additional Links
 Topics
 Keywords

 CRRA intertemporal CAPM
 Pricing uncertain income streams
 Singleprice law of markets
 Arbitrage
 Stateprices
 Consumptionbased CAPM
 Local expectations hypothesis
 Unbiased term structure
 Random walk
 Option pricing
 Timeadditive utility
 Logarithmic utility
 Black– Scholes formula
 Equity risk premium puzzle
 Joint normality covariance theorem
 Industry Sectors
 eBook Packages
 Editors

 ChengFew Lee ^{(1)}
 Alice C. Lee ^{(2)}
 John Lee ^{(3)}
 Editor Affiliations

 1. Department of Finance and Economics, Rutgers University
 2.
 3. Center for PBBEF Research
 Authors

 Mark Rubinstein ^{(1)}
 Author Affiliations

 1. University of California, Berkley, CA, USA
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