Title: Price convergence and fundamentals in asset markets with bankruptcy risk: an experiment

Authors: Tekin Kose

Addresses: Faculty of Economics, Administrative and Social Sciences, Department of Economics, Ted University, Ziya Gokalp Caddesi, No. 48 Kolej 06420, Ankara, Turkey

Abstract: I study price convergence in asset markets with indefinite duration induced by existence of bankruptcy risk. By introducing increasing and decreasing fundamental value paths via experimental methodology, this study extends knowledge about traders' incentives in asset markets with indefinite horizons. In most cases, the data indicate significant undervaluation of assets without a buyback value under bankruptcy risk regardless of fundamental value regime. The transaction prices closely follow the fundamental value trend of the asset supported by a terminal value in both definite and indefinite time horizons with constant fundamentals.

Keywords: bankruptcy risk; negative bubbles; indefinite duration; experimental asset markets; fundamentals; price convergence; trader incentives; asset undervaluation; buyback value.

DOI: 10.1504/IJBAF.2015.075332

International Journal of Behavioural Accounting and Finance, 2015 Vol.5 No.3/4, pp.242 - 278

Received: 28 Feb 2015
Accepted: 14 Aug 2015
Published online: 15 Mar 2016 *

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