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

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.