Basic Principles Of Asset Pricing Theory: Evidence From Large-Scale Experimental Financial Markets
We report on six large-scale financial markets experiments that were designed to test two of the most basic propositions of modern asset pricing theory, namely, that the interaction between risk averse agents in a competitive market leads to equilibration, and that, in equilibrium, risk premia are solely determined by covariance with aggregate risk. We designed the experiments within the framework suggested by two theoretical models, namely, Arrow and Debreu's complete-markets model, and the Sharpe-Lintner-Mossin Capital Asset Pricing Model (CAPM). This framework enabled us to measure how far our markets were from equilibrium at any point in time, thereby allowing us to gauge the success of the models. The distance measures do not require knowledge of the (uncontrollable) level and dispersion of risk aversion among subjects, and adjust for the impact of progressive trading on the eventual equilibrium. Unlike in our earlier, thin-markets experiments, we discovered swift convergence towards equilibrium prices of Arrow and Debreu's model or the CAPM. This discovery is significant, because subjects always lacked the information to deliberately set asset prices using either model. Sometimes, however, the equilibrium was not found to be robust, with markets readily veering away, apparently as a result of deviations of subjective beliefs from objective probabilities. Still, we find evidence that this did not destroy the tendency for markets to equilibrate as predicted by the theory. In each experiment, we formally test and reject the hypothesis that prices are a random walk, in favour of stochastic convergence towards CAPM and Arrow-Debreu equilibrium.
|Date of creation:||Oct 2000|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- Forsythe, Robert & Palfrey, Thomas R & Plott, Charles R, 1984. " Futures Markets and Informational Efficiency: A Laboratory Examination," Journal of Finance, American Finance Association, vol. 39(4), pages 955-981, September.
- Bossaerts, Peter & Kleiman, Daniel & Plott, Charles, 1998. "Price Discovery in Financial Markets: The Case of the CAPM," Working Papers 1032, California Institute of Technology, Division of the Humanities and Social Sciences.
- repec:cdl:ucsbec:22-98 is not listed on IDEAS
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
- Charles N. Noussair & Charles R. Plott & Raymond G. Riezman, 2013.
"An Experimental Investigation of the Patterns of International Trade,"
World Scientific Book Chapters,in: International Trade Agreements and Political Economy, chapter 17, pages 299-328
World Scientific Publishing Co. Pte. Ltd..
- Noussair, Charles N & Plott, Charles R & Riezman, Raymond G, 1995. "An Experimental Investigation of the Patterns of International Trade," American Economic Review, American Economic Association, vol. 85(3), pages 462-491, June.
- Noussair, Charles & Plott, Charles & Riezman, Raymond., "undated". "An Experimental Investigation of the Patterns of International Trade," Working Papers 799, California Institute of Technology, Division of the Humanities and Social Sciences.
- Plott, Charles R & Sunder, Shyam, 1988.
"Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets,"
Econometric Society, vol. 56(5), pages 1085-1118, September.
- Plott, Charles R. & Sunder, Shyam., "undated". "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
- Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages 85-118, Suppl. De.
- Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
- Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-859, July.
- Lei, V. & Noussair, C. & Plott, C.R., 1998. "Non-Speculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality," Purdue University Economics Working Papers 1120, Purdue University, Department of Economics.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
- Anderson, Christopher M. & Plott, Charles R. & Shimomura, K.-I.Ken-Ichi & Granat, Sander, 2004. "Global instability in experimental general equilibrium: the Scarf example," Journal of Economic Theory, Elsevier, vol. 115(2), pages 209-249, April.
- Anderson, Christopher M. & Granat, Sander & Plott, Charles R. & Shimomura, Ken-Ichi, 2000. "Global Instability in Experimental General Equilibrium: The Scarf Example," Working Papers 1086, California Institute of Technology, Division of the Humanities and Social Sciences.
- Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October.
- Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
- 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, vol. 4(2), pages 129-176, March.
- Nielsen, Lars Tyge, 1988. "Uniqueness of Equilibrium in the Classical Capital Asset Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(03), pages 329-336, September.
- Levy, Haim, 1997. "Risk and Return: An Experimental Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(1), pages 119-149, February.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
- Kroll, Yoram & Levy, Haim & Rapoport, Amnon, 1988. "Experimental Tests of the Separation Theorem and the Capital Asset Pricing Model," American Economic Review, American Economic Association, vol. 78(3), pages 500-519, June.
- Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
- Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
- Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2578. See general information about how to correct material in RePEc.
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.