This paper proposes a paradigm shift in the valuation of long term contracts, away from classical no-arbitrage pricing towards pricing under the real world probability measure. In contrast to risk neutral pricing, which is a form of relative pricing, the long term average excess return of the...

Standard theoretical model cannot generate positive and large real bond risk premium under power utility preferences. Following recent developments in equity premium literature we explore bond premium in a long run risk environment with generalized isoleastic preferences. This approach explains...