A financial asset is expected to generate future cash flows. The asset’s present value is linked to the riskiness associated with the future cash flows in a specific manner in the capital markets. The concept of no-arbitrage plays a central role in this linkage. The dividend discount model (DDM) follows the no-arbitrage assumption in the capital markets. It is the fundamental pricing model; ultimately, all equity valuation models must reconcile with it.

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The No-arbitrage Assumption and the Dividend Discount Model

  • Pengguo Wang

摘要

A financial asset is expected to generate future cash flows. The asset’s present value is linked to the riskiness associated with the future cash flows in a specific manner in the capital markets. The concept of no-arbitrage plays a central role in this linkage. The dividend discount model (DDM) follows the no-arbitrage assumption in the capital markets. It is the fundamental pricing model; ultimately, all equity valuation models must reconcile with it.