A Dynamic General Equilibrium Approach to Asset Pricing Experiments
AbstractWe report results from a laboratory experiment that implements a consumption-based dynamic general equilibrium model of asset pricing. This work-horse model of the macrofinance literature posits that agents buy and sell assets for the purpose of intertemporally smoothing consumption, and that asset prices are determined by individual risk and time preferences as well as the distribution of income and dividends. The experimental findings are largely supportive of the modelï¿½s theoretical predictions. Notably we observe that asset price bubbles, defined as sustained departures of prices from those implied by fundamentals, are infrequent and short-lived. This finding is a stark departure from many recent multi-period asset pricing experiments that lack a consumption-smoothing objective. Indeed, we find that when subjects are induced to adjust shareholdings to smooth consumption, assets typically trade at a discount relative to their expected value and market participation is broad; when the consumption smoothing motivation to trade assets is removed in an otherwise identical economy, assets frequently trade at a premium relative to fundamentals and shareholdings become highly concentrated.
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Bibliographic InfoPaper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 398.
Date of creation: Jun 2010
Date of revision: Jun 2010
Find related papers by JEL classification:
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- 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-2010-07-10 (All new papers)
- NEP-DGE-2010-07-10 (Dynamic General Equilibrium)
- NEP-EXP-2010-07-10 (Experimental Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- A Dynamic General Equilibrium Approach to Asset Pricing Experiments
by Christian Zimmermann in NEP-DGE blog on 2010-07-13 02:40:42
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