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Abstract

This paper applies experimental methods to evaluate the completeness of arbitrage and rate of return parity in simultaneous asset markets in which the assets are denominated in different currencies. Two assets, which return uncertain, but known, dividends in each trading period, are traded over twenty periods, after which the asset has no value. Results indicate that risk neutral rate of return parity is a strong predictor of relative asset prices when assets have common expected dividends and the expected dividends have common variances. The predictive power of risk neutral rate of return parity is reduced as the assets become differentiated.

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File URL: http://socserv.mcmaster.ca/econ/mceel/papers/rrp2004jan27.pdf
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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2004-01.

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Length: 35 pages
Date of creation: Jan 2004
Date of revision:
Handle: RePEc:mcm:deptwp:2004-01

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Find related papers by JEL classification:

• C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
• G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

This paper has been announced in the following NEP Reports:

• NEP-ALL-2004-10-21 (All new papers)
• NEP-FIN-2004-10-21 (Finance)

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1. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
   
   • Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
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   • Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
   • Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
2. Smith, Vernon L, 1985. "Experimental Economics: Reply," American Economic Review, American Economic Association, vol. 75(1), pages 264-72, March.
3. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
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7. E. Scott Mayfield & Robert G. Murphy, 1993. "Interest Rate Parity And The Exchange Risk Premium: Evidence From Panel Data," Boston College Working Papers in Economics 239, Boston College Department of Economics.
   
   • Mayfield, E. Scott & Murphy, Robert G., 1992. "Interest rate parity and the exchange risk premium Evidence from panel data," Economics Letters, Elsevier, vol. 40(3), pages 319-324, November.
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   • J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
   • De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
9. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
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Cited by:

1. Jason Childs, 2007. "Rate of Return Parity with Robot Asset Traders," Computational Economics, Society for Computational Economics, vol. 29(1), pages 1-12, February.
2. Childs, Jason, 2009. "Rate of return parity and currency crises in experimental asset markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 157-170, February.

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