'Lucas' In The Laboratory (forthcoming in Journal of Finance)

Elena Asparouhova, Peter Bossaerts, Nilanjan Roy and William Zame
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Elena Asparouhova: University of Utah
Peter Bossaerts: University of Utah and University of Melbourne
Nilanjan Roy: City University of Hong Kong

No 314, Economics Series from Institute for Advanced Studies

Abstract: The Lucas asset pricing model is studied here in a controlled setting. Participants could trade two long-lived securities in a continuous open-book system. The experimental design emulated the stationary, infinite-horizon setting of the model and incentivized participants to smooth consumption across periods. Consistent with the model, prices aligned with consumption betas, and they co-moved with aggregate dividends, more strongly so when risk premia were higher. Trading significantly increased consumption smoothing compared to autarky. Nevertheless, as in field markets, prices were excessively volatile. The noise corrupted traditional GMM tests. Choices displayed substantial heterogeneity: no subject was representative for pricing.

Pages: 95 pages
Date: 2015-06
New Economics Papers: this item is included in nep-dge and nep-exp
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https://irihs.ihs.ac.at/id/eprint/3587 First version, 2015 (application/pdf)

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