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‘Lucas’ In The Laboratory


  • Elena Asparouhova

    (University of Utah)

  • Peter Bossaerts


  • Nilanjan Roy


  • William Zame

    (University of California, Los Angeles)


This 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).

Suggested Citation

  • Elena Asparouhova & Peter Bossaerts & Nilanjan Roy & William Zame, 2013. "‘Lucas’ In The Laboratory," EIEF Working Papers Series 1314, Einaudi Institute for Economics and Finance (EIEF), revised May 2013.
  • Handle: RePEc:eie:wpaper:1314

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    References listed on IDEAS

    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    3. Darrell Duffie & Chi-Fu Huang, 2005. "Implementing Arrow-Debreu Equilibria By Continuous Trading Of Few Long-Lived Securities," World Scientific Book Chapters,in: Theory Of Valuation, chapter 4, pages 97-127 World Scientific Publishing Co. Pte. Ltd..
    4. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2016. "Stock Market Volatility and Learning," Journal of Finance, American Finance Association, vol. 71(1), pages 33-82, February.
    5. 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, vol. 91(2), pages 249-265, April.
    6. 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.
    7. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    8. Ian Martin, 2013. "The Lucas Orchard," Econometrica, Econometric Society, vol. 81(1), pages 55-111, January.
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    10. Elena Asparouhova, 2006. "Competition in Lending: Theory and Experiments," Review of Finance, European Finance Association, vol. 10(2), pages 189-219.
    11. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
    12. Kenneth L. Judd & Felix Kubler & Karl Schmedders, 2003. "Asset Trading Volume with Dynamically Complete Markets and Heterogeneous Agents," Journal of Finance, American Finance Association, vol. 58(5), pages 2203-2218, October.
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    14. 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, vol. 17(1), pages 27-55, September.
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    JEL classification:

    • 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

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