The St. Petersburg paradox and capital asset pricing

Assaf Eisdorfer () and Carmelo Giaccotto ()
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Assaf Eisdorfer: University of Connecticut
Carmelo Giaccotto: University of Connecticut

Annals of Finance, 2016, vol. 12, issue 1, No 1, 16 pages

Abstract: Abstract Durand (J Finance 12:348–363, 1957) shows that the classical St. Petersburg paradox can apply to the valuation of a firm whose dividends grow at a constant rate forever. To capture a more realistic pattern of dividends, we model the dividend growth rate as a mean reverting process, and then use the capital asset pricing model to derive the risk-adjusted present value. The model generates an equivalent St. Petersburg game. The long-run growth rate of the payoffs (dividends) is dominant in driving the value of the game (firm), and the condition under which the value is finite is less restrictive than that of the standard game.

Keywords: Capital asset pricing model (CAPM); Stochastic dividends; Equity valuation; Dividend discount model; St. Petersburg paradox (search for similar items in EconPapers)
JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10436-015-0269-x

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