The Relationship (Or Not) Between Asset Prices and Fundamental Value

This dissertation explores topics related to a central question: What factors determine the fundamental value of an asset, and when, how, and why do asset prices diverge from fundamental value? Fundamental value incorporates the expected value of the cash flows, as well as premia for risk and perhaps for uncertainty. One reason, apparent from literature regarding experimental markets, is speculation. Price bubbles and crashes are caused by, at least, confusion, lack of common expectations, and excess and variable liquidity. In Chapter 1 I review an experiment where these factors are tightly controlled, and where prices appear to converge to fundamental value. Moreover, I find that downside risk is a significant determinant of fundamental value, while expected variance is not. Next, I introduce uncertainty with respect to the cash flow of the asset and do not find any evidence that the introduction of uncertainty moves price away from fundamental value. Chapter 2 deals with market intervention. In an experimental market, I introduce a quantitative easing program into a bond market, and find some evidence that subjects front-run the large buyer, pushing up prices before and during periods of intervention. In Chapter 3, I employ a field study to explore various factors that may influence fundamental value. In particular, I use estimates of expected returns to test standard asset pricing models. Beta and size appear to play a role in the formation of fundamental value. Evidence related to other often-cited determinants, such as valuation and momentum, does not comport with field research using ex-post actual returns