Stochastic Asset Pricing with Seismic Hazard Risk

Abstract

Since cash flow of asset in the long run is generally subject to economic fluctuation, and also to potential damage due to seismic hazard risk, asset pricing is more relevantly evaluated, provided that uncertainties of both cash flow and seismic risk are properly taken into account. This study will propose a discounted cash flow method to evaluate asset pricing, in which incomes gained from asset are modeled as a Markov process and seismic loss is modeled due to only one earthquake event during the service time. A numerical example is demonstrated for an 11 story steel reinforced commercial building considering the service time of 50 years. Various risk–asset price curves are numerically obtained in the form of probability of excess versus asset price with discount rate as a parameter for cases with and without earthquake loss taken into account, and for a case in which earthquake strengthening measure is implemented. These curves contribute information to decision makers in charge of risk and investment management.