“Lucas” in the Laboratory

Elena Asparouhova, Peter Bossaerts, Nilanjan Roy and William Zame

Journal of Finance, 2016, vol. 71, issue 6, 2727-2780

Abstract: We study the Lucas asset pricing model in a controlled setting. Participants trade two long‐lived securities in a continuous open‐book system. The experimental design emulates the stationary, infinite‐horizon setting of the model and incentivizes participants to smooth consumption across periods. Consistent with the model, prices align with consumption betas and comove with aggregate dividends, particularly so when risk premia are higher. Trading significantly increases consumption smoothing compared to autarky. Nevertheless, as in field markets, prices are excessively volatile. The noise corrupts traditional generalized method of moment tests. Choices display substantial heterogeneity, with no subject representative for pricing.

Date: 2016
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Citations: View citations in EconPapers (14)

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https://doi.org/10.1111/jofi.12392

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Working Paper: ‘Lucas’ In The Laboratory (2013)
Working Paper: 'Lucas' In The Laboratory (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:71:y:2016:i:6:p:2727-2780

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