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

Posted: 26 Jan 2012

See all articles by Nuriddin Ikromov

Nuriddin Ikromov

affiliation not provided to SSRN

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Date Written: January 24, 2012

Abstract

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.

Keywords: Efficient market hypothesis, Cash flow volatility, Price volatility, Experimental economics

Suggested Citation

Ikromov, Nuriddin and Yavas, Abdullah, Cash Flow Volatility, Prices and Price Volatility: An Experimental Study (January 24, 2012). Journal of Real Estate Finance and Economics, Vol. 44, Nos. 1/2, 2012. Available at SSRN: https://ssrn.com/abstract=1991365

Nuriddin Ikromov (Contact Author)

affiliation not provided to SSRN ( email )

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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