Comovement and return predictability in asset markets: An experiment with two Lucas trees

Charles Noussair and Andreea Victoria Popescu

Journal of Economic Behavior & Organization, 2021, vol. 185, issue C, 671-687

Abstract: Using a laboratory experiment, we investigate whether comovement can emerge between two risky assets, despite their fundamentals not being correlated. The ‘Two trees’ asset pricing model developed by Cochrane et al. (2007) guides our experimental design and its predictions serve as our source of hypotheses. The model makes time-series and cross-section return predictions following a shock to one of the two assets’ dividend distributions. As the model predicts, we observe (1) positive contemporaneous correlation between the two assets, (2) positive autocorrelation in the shocked asset, and (3) time-series and cross-sectional return predictability from the dividend-price ratio. In line with the rational foundations of the model, the model's predictions have stronger support in markets with relatively sophisticated agents.

Keywords: Comovement; Asset pricing; Two trees model; Experimental finance; Time series momentum; Return predictability (search for similar items in EconPapers)
JEL-codes: C53 C92 D50 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:185:y:2021:i:c:p:671-687

DOI: 10.1016/j.jebo.2021.03.012

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