Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments
AbstractMany tests of asset-pricing models address only the pricing predictions, but these pricing predictions rest on portfolio choice predictions that 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 into account the general equilibrium effects of sample-size bias. This paper works through the approach in detail for the case of the classical capital asset pricing model (CAPM), producing a model called CAPM+ε. When these econometric tests are applied to data generated by large-scale laboratory asset markets that reveal both prices and portfolio choices, CAPM+εis not rejected. Copyright The Econometric Society 2007.
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Bibliographic InfoArticle provided by Econometric Society in its journal Econometrica.
Volume (Year): 75 (2007)
Issue (Month): 4 (07)
Other versions of this item:
- Peter Bossaerts & Charles Plott & William R. Zame, 2003. "Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments," Swiss Finance Institute Research Paper Series 07-05, Swiss Finance Institute, revised Mar 2007.
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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- Pesaran, M. Hashem & Yamagata, Takashi, 2012.
"Testing CAPM with a Large Number of Assets,"
IZA Discussion Papers
6469, Institute for the Study of Labor (IZA).
- Eichberger, Jürgen & Rheinberger, Klaus & Summer, Martin, 2012.
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1445, European Central Bank.
- Pesaran, M. H. & Yamagata, T., 2012. "Testing CAPM with a Large Number of Assets (Updated 28th March 2012)," Cambridge Working Papers in Economics 1210, Faculty of Economics, University of Cambridge.
- Catherine Eckel & Rick Wilson, 2006. "Internet cautions: Experimental games with internet partners," Experimental Economics, Springer, vol. 9(1), pages 53-66, April.
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