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

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  • Peter Bossaerts
  • Charles Plott
  • William R. Zame

Abstract

Many 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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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2007.00780.x
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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 75 (2007)
Issue (Month): 4 (07)
Pages: 993-1038

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Handle: RePEc:ecm:emetrp:v:75:y:2007:i:4:p:993-1038

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Cited by:
  1. M Hashem Pesaran & Takashi Yamagata, 2012. "Testing CAPM with a Large Number of Assets," Discussion Papers 12/05, Department of Economics, University of York.
  2. repec:onb:oenbwp:y::i:172:b:1 is not listed on IDEAS
  3. Eichberger, Jürgen & Rheinberger, Klaus & Summer, Martin, 2012. "Credit risk in general equilibrium," Working Paper Series 1445, European Central Bank.
  4. Asparouhova, Elena & Bossaerts, Peter, 2009. "Modelling price pressure in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 119-130, October.
  5. 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.
  6. Steven Tucker & Charles Noussair & Charles N. Noussair & Steven Tucker, 2013. "Experimental Research On Asset Pricing," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 554-569, 07.
  7. Anufriev, M. & Tuinstra, J. & Bao, T., 2013. "Fund Choice Behavior and Estimation of Switching Models: An Experiment," CeNDEF Working Papers 13-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  8. Cary Frydman & Nicholas Barberis & Colin Camerer & Peter Bossaerts & Antonio Rangel, 2012. "Using Neural Data to Test a Theory of Investor Behavior: An Application to Realization Utility," NBER Working Papers 18562, National Bureau of Economic Research, Inc.
  9. John Duffy & Sean Crockett, 2010. "An Experimental Test of the Lucas Asset Pricing Model," Working Papers 504, University of Pittsburgh, Department of Economics, revised May 2013.
  10. 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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