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A Dynamic General Equilibrium Approach to Asset Pricing Experiments

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  • John Duffy

Abstract

We 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 model�s 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 Info

Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 398.

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Date of creation: Jun 2010
Date of revision: Jun 2010
Handle: RePEc:pit:wpaper:398

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  1. 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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Cited by:
  1. Orland, Andreas & Roos, Michael W.M., 2013. "The New Keynesian Phillips curve with myopic agents," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(11), pages 2270-2286.
  2. Bao, T. & Duffy, J. & Hommes, C.H., 2011. "Learning, Forecasting and Optimizing: an Experimental Study," CeNDEF Working Papers 11-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Elena Asparouhova & Peter Bossaerts & Nilanjan Roy & William Zame, 2013. "'Lucas' In The Laboratory," NBER Working Papers 19068, National Bureau of Economic Research, Inc.
  4. Volodymyr Lugovskyy & Daniela Puzzello & Steven Tucker, 2009. "An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Pricing Mechanism," Working Papers in Economics 09/19, University of Canterbury, Department of Economics and Finance.
  5. repec:nbr:nberch:12923 is not listed on IDEAS

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