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Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments

Peter Bossaerts, Charles Plott () and William Zame
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Peter Bossaerts: California Institute of Technology Centre for Economic Policy Research and Swiss Finance Institute

No 07-05, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Many tests of asset pricing models address only the pricing predictions — but these pricing predictions rest on portfolio choice predictions which seem obviously wrong. This paper suggests a new approach to asset pricing and portfolio choices, based on unobserved heterogeneity. This approach yields the standard pricing conclusions of classical models but is consistent with very different portfolio choices. Novel econometric tests link the price and portfolio predictions and take account of the general equilibrium effects of sample-size bias. The paper works through the approach in detail for the case of the classical CAPM, producing a model called CAPM+€. When these econometric tests are applied to data generated by large-scale laboratory asset markets which reveal both prices and portfolio choices, CAPM+€ is not rejected.

Keywords: experimental finance; experimental asset markets; risk aversion (search for similar items in EconPapers)
JEL-codes: C91 C92 D51 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-exp and nep-fmk
Date: 2007-03
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Journal Article: Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments (2007) Downloads
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