Cash Flow Volatility, Prices and Price Volatility: An Experimental Study

Cash Flow Volatility, Prices and Price Volatility: An Experimental Study The value of an asset is equal to the present value of its expected future cash flows. It is affected by the magnitude, timing and riskiness, or volatility, of the cash flows. We hypothesize that if the expected values of two assets’ cash flows are equal, the value of the asset with more volatile cash flows will be lower. Furthermore, we examine the impact of the volatility of cash flows on the volatility of prices. We consider a simple experimental environment where subjects trade in an asset which provides dividends from a known probability distribution. The expected value of the dividends is identical in all experimental treatments. The treatments vary with respect to the volatility of dividends. We find that when dividends are more volatile, transaction prices are lower. We also find that the volatility of prices is lower in the treatment with highly volatile dividends. In addition, as expected, trading volume is lower when cash flows are less volatile. The Journal of Real Estate Finance and Economics Springer Journals

Cash Flow Volatility, Prices and Price Volatility: An Experimental Study

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Springer US
Copyright © 2011 by Springer Science+Business Media, LLC
Economics; Regional/Spatial Science; Financial Services
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