Jason Childs
University of New Brunswick at Saint John
Stuart Mestelman
McMaster University
Abstract
This paper applies experimental methods to evaluate the completeness of arbitrage and rate-of-return parity in simultaneous asset markets in which the assets are denominated in different currencies. Two assets, which return uncertain, but known, dividends in each trading period, are traded over twenty periods, after which the asset has no value. Results indicate that risk neutral rate-of-return parity is a strong predictor of relative asset prices when assets have common expected dividends and the expected dividends have common variances. The predictive power of risk neutral rate-of-return parity is reduced as the assets become differentiated.
Acknowledgements
The authors are indebted to guidance and comments from Kenneth S. Chan, R. Andrew Muller, Douglas D. Davis, Neil J. Buckley and two anonymous referees. Childs and Mestelman acknowledge the support of McMaster University’s Arts Research Board and Mestelman acknowledges support from the Social Sciences and Humanities Research Council of Canada.
JEL Classification Number(s): F39, F41, C90
Date: 19 April 2005
Address of Contact Author: Jason Childs, Department of Social Sciences, University of New Brunswick, Post Office Box 5050, Saint John, New Brunswick, E2L 4L5, Canada. Tel: 506-648-5739, Fax: 506-648-5947, E-mail: jchilds@unbsj.ca.
Links to: [ pdf | Appendices 1 and 2 ]