'Lucas' In The Laboratory
AbstractThis paper reports on experimental tests of an instantiation of the Lucas asset pricing model with heterogeneous agents and time-varying private income streams. Central features of the model (infinite horizon, perishability of consumption, stationarity) present difficult challenges and require a novel experimental design. The experimental evidence provides broad support for the qualitative pricing and consumption predictions of the model (prices move with fundamentals, agents smooth consumption) but sharp differences from the quantitative predictions emerge (asset prices display excess volatility, agents do not hedge price risk). Generalized Method of Moments (GMM) tests of the stochastic Euler equations yield very different conclusions depending on the instruments chosen. It is suggested that the qualitative agreement with and quantitative deviation from theoretical predictions arise from agents' expectations about future prices, which are almost self-fulfilling and yet very different from what they would need to be if they were exactly self-fulfilling (as the Lucas model requires).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19068.
Date of creation: May 2013
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- 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-2013-06-04 (All new papers)
- NEP-EXP-2013-06-04 (Experimental Economics)
- NEP-FOR-2013-06-04 (Forecasting)
- NEP-MAC-2013-06-04 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Timothy J Kehoe & David K Levine, 1993.
"Debt Constrained Asset Markets,"
Levine's Working Paper Archive
1276, David K. Levine.
- Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers, Federal Reserve Bank of Minneapolis 445, Federal Reserve Bank of Minneapolis.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- Elena Asparouhova, 2006. "Competition in Lending: Theory and Experiments," Review of Finance, European Finance Association, European Finance Association, vol. 10(2), pages 189-219.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Tarek A. Hassan & Thomas M. Mertens, 2011.
"The Social Cost of Near-Rational Investment,"
NBER Working Papers
17027, National Bureau of Economic Research, Inc.
- Thomas M. Mertens & Tarek A. Hassan, 2010. "The Social Cost of Near-Rational Investment," 2010 Meeting Papers, Society for Economic Dynamics 370, Society for Economic Dynamics.
- Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, Elsevier, vol. 4(2), pages 129-176, March.
- Kenneth L. Judd & Felix Kubler & Karl Schmedders, 2003.
"Asset Trading Volume with Dynamically Complete Markets and Heterogeneous Agents,"
Journal of Finance, American Finance Association,
American Finance Association, vol. 58(5), pages 2203-2218, October.
- Kenneth L. Judd & Felix Kubler & Karl Schmedders, 2000. "Asset Trading Volume with Dynamically Complete Markets and Heterogeneous Agents," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1294, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- John Duffy & Sean Crockett, 2010. "An Experimental Test of the Lucas Asset Pricing Model," Working Papers, University of Pittsburgh, Department of Economics 504, University of Pittsburgh, Department of Economics, revised May 2013.
- Ian Martin, 2011.
"The Lucas Orchard,"
NBER Working Papers
17563, National Bureau of Economic Research, Inc.
- Duffie, J Darrell & Huang, Chi-fu, 1985. "Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1337-56, November.
- Dunn, Kenneth B. & Singleton, Kenneth J., 1986. "Modeling the term structure of interest rates under non-separable utility and durability of goods," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(1), pages 27-55, September.
- John Duffy, 2010. "A Dynamic General Equilibrium Approach to Asset Pricing Experiments," Working Papers, University of Pittsburgh, Department of Economics 398, University of Pittsburgh, Department of Economics, revised Jun 2010.
- Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.