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The Replacement-Cost of State-Contingent Claims: A Perspective on Security Prices

By switching the underlying space for fundamental value from a commodity space to a property space, we build up a preference space characterized by investment felicity, which accommodates traditional as well as newly identified sources of cost and uncertainty in financial markets. State-contingent claims in the novel preference space are valuated in terms of market replacement-cost rather than in terms of production cost. Therefore, an alternative viable price system to the neoclassical one can be derived and a correspondent factor pricing model be specified. Moreover, thanks to the identification between endogenous pricing and exogenous price effects, we suggest a new methodological structure for security prices in which pricing factors are clearly distinguished from state variables.