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 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.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-05.
Length: 61 pages
Date of creation: Jul 2003
Date of revision: Mar 2007
experimental finance; experimental asset markets; risk aversion;
Other versions of this item:
- Peter Bossaerts & Charles Plott & William R. Zame, 2007. "Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments," Econometrica, Econometric Society, vol. 75(4), pages 993-1038, 07.
- 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; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-20 (All new papers)
- NEP-ECM-2007-10-20 (Econometrics)
- NEP-EXP-2007-10-20 (Experimental Economics)
- NEP-FMK-2007-10-20 (Financial Markets)
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- M Hashem Pesaran & Takashi Yamagata, 2012.
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12/05, Department of Economics, University of York.
- Eichberger, Jürgen & Rheinberger, Klaus & Summer, Martin, 2012.
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- 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.
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