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The St. Petersburg paradox and capital asset pricing

Author

Listed:
  • Assaf Eisdorfer

    (University of Connecticut)

  • Carmelo Giaccotto

    (University of Connecticut)

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.

Suggested Citation

  • Assaf Eisdorfer & Carmelo Giaccotto, 2016. "The St. Petersburg paradox and capital asset pricing," Annals of Finance, Springer, vol. 12(1), pages 1-16, February.
    • Handle: RePEc:kap:annfin:v:12:y:2016:i:1:d:10.1007_s10436-015-0269-x
    DOI: 10.1007/s10436-015-0269-x
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    References listed on IDEAS

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    Cited by:

    1. Ruggero Paladini, 2017. "Il paradosso di S. Pietroburgo, una rassegna," Public Finance Research Papers 29, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.

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    More about this item

    Keywords

    Capital asset pricing model (CAPM); Stochastic dividends; Equity valuation; Dividend discount model; St. Petersburg paradox;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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