A test of the Modigliani Miller Invariance Theorem and Arbitrage in Experimental Asset Markets

Reference : A test of the Modigliani Miller Invariance Theorem and Arbitrage in Experimental Asse...


	Document type :	E-prints/Working papers : Already available on another site
	Discipline(s) :	Business & economic sciences : Finance
	Focus Areas :	Finance
	To cite this reference:	http://hdl.handle.net/10993/40795

Title :	A test of the Modigliani Miller Invariance Theorem and Arbitrage in Experimental Asset Markets
Language :	English
Author, co-author :	Neugebauer, Tibor [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF) >]
	Charness, Gary []
Publication date :	19-Jan-2018
Number of pages :	69
Peer reviewed :	No
Keywords :	[en] Modigliani-Miller theorem ; asset market ; twin share
Abstract :	[en] Modigliani and Miller (1958) show that a repackaging of asset return streams to equity and debt has no impact on the total market value of the firm if pricing is arbitrage-free. We test the empirical validity of this invariance theorem in experimental asset markets with simultaneous trading in two shares of perfectly-correlated returns. Our data support value invariance for assets of identical risks when returns are perfectly correlated. However, exploiting price discrepancies has risk when returns have the same expected value but are uncorrelated, and we find that the law of one price is violated in this case. Discrepancies shrink in consecutive markets, but seem to persist even with experienced traders. In markets where overall trader acuity is high, assets trade closer to parity.
Permalink :	http://hdl.handle.net/10993/40795
source URL :	https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3428299

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Open access	SSRN-id3428299 (1).pdf	published in Journal of Finance 2019	Publisher postprint	585.58 kB	View/Open

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