Pricing Indefinitely Lived Assets: Experimental Evidence
John Duffy, Janet Hua Jiang, Huan Xie
Management Science · 2024 · Volume 70 · Issue 12
Abstract
We study indefinitely lived assets in experimental markets and find that the traded prices of these assets are on average about 40% of the risk-neutral fundamental value. Neither uncertainty about the value of total dividend payments nor horizon uncertainty about the duration of trade can account for this low traded price. An Epstein-Zin recursive preference specification that models the dynamic realization of dividend payments, combined with either probability weighting or subjects’ heterogeneous risk attitudes, can rationalize the low traded prices observed in our indefinitely lived asset market. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: This work was supported by Concordia University and the Bank of Canada. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.03059 .
Keywords
asset pricing, behavioral finance, experiments, indefinite horizon, random termination, risk and uncertainty, Epstein–Zin recursive preferences, probability weighting
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