Stranger Times : The Impact of Relativistic Time Concepts on the Time Value of Money

The notion that time is relative has been widely accepted by physicists since Albert Einstein formulated his theory of relativity in 1905. However, many other scientific disciplines, like finance and economics, have thus far disregarded relativistic time concepts. In this paper, I show how a relativistic approach towards time influences the core principle of finance theory, the time value of money concept. I show that, to avoid arbitrage, relativistic time concepts call for an adjustment to time value of money calculations – the concept of proper interest. Adjusting time value of money functions leads to a market-wide changes in financing costs for firms. Furthermore, I propose that variation in life expectancy is a proxy for time dilation. Therefore, I use a relativistic time concept to amend the Lucas Paradox and show that current methods of explaining the paradox might gravely underestimate its magnitude