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Experimental Asset Markets with An Indefinite Horizon

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Listed:
  • John Duffy

    (University of California, Irvine)

  • Janet Hua Jiang

    (Bank of Canada)

  • Huan Xie

    (Concordia University)

Abstract

We study the trade of indefinitely-lived assets in experimental markets. The traded prices of these assets are on average more than 40% below the risk-neutral fundamental value under the expected utility assumption. We examine the effects of three interrelated factors for the traded price, payoff uncertainty about the asset’s dividend payments, horizon uncertainty about the duration of trade, and the expected utility assumption. Our results suggest that horizon uncertainty does not significantly affect the traded price. Incorporating risk aversion into non-expected utility models with recursive preferences and probability weighting can rationalize the low prices observed in our indefinite-horizon asset markets.

Suggested Citation

  • John Duffy & Janet Hua Jiang & Huan Xie, 2019. "Experimental Asset Markets with An Indefinite Horizon," Working Papers 19005, Concordia University, Department of Economics.
    • Handle: RePEc:crd:wpaper:19005
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    1. Evans, George W. & Hommes, Cars & McGough, Bruce & Salle, Isabelle, 2022. "Are long-horizon expectations (de-)stabilizing? Theory and experiments," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 44-63.

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    More about this item

    Keywords

    asset pricing; behavioral finance; experiments; indefinite horizon; random termination; risk and uncertainty; expected utility; Epstein-Zin recursive preferences; probability weighting;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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