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

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Author Info

  • Peter Bossaerts

    (California Institute of Technology Centre for Economic Policy Research and Swiss Finance Institute)

  • Charles Plott

    (California Institute of Technology)

  • William R. Zame

    (UCLA and California Institute of Technology)

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.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-05.

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Length: 61 pages
Date of creation: Jul 2003
Date of revision: Mar 2007
Handle: RePEc:chf:rpseri:rp0705

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: experimental finance; experimental asset markets; risk aversion;

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Cited by:
  1. Jürgen Eichberger & Klaus Rheinberger & Martin Summer, 2011. "Credit Risk in General Equilibrium," Working Papers 172, Oesterreichische Nationalbank (Austrian Central Bank).
  2. 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.
  3. 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).
  4. repec:onb:oenbwp:y::i:172:b:1 is not listed on IDEAS
  5. Asparouhova, Elena & Bossaerts, Peter, 2009. "Modelling price pressure in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 119-130, October.
  6. 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.
  7. 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.
  8. 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.
  9. Catherine Eckel & Rick Wilson, 2006. "Internet cautions: Experimental games with internet partners," Experimental Economics, Springer, vol. 9(1), pages 53-66, April.
  10. 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.

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