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An Experimental Test of the Lucas Asset Pricing Model

  • John Duffy
  • Sean Crockett

We implement a dynamic asset pricing experiment in the spirit of Lucas (1978) with storable assets and non-storable cash. In one treatment we impose diminishing marginal returns to cash to incentivize consumption-smoothing across periods, while in a second treatment there is no induced motive for trade. In the former case subjects smooth consumption, and assets trade at a discount relative to the risk-neutral fundamental price. This under-pricing is a departure from the `bubbles` observed in the experimental asset pricing experiments of Smith et al. (1988). In our second treatment with no induced motive for trade, assets trade at a premium relative to expected value and shareholdings are highly concentrated.

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Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 504.

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Date of creation: Feb 2010
Date of revision: May 2013
Handle: RePEc:pit:wpaper:504
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  1. Pedro Dal Bo & Guillaume R. Frochette, 2011. "The Evolution of Cooperation in Infinitely Repeated Games: Experimental Evidence," American Economic Review, American Economic Association, vol. 101(1), pages 411-29, February.
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  7. 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.
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  12. 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.
  13. Katerina Sherstyuk & Nori Tarui & Tatsuyoshi Saijo, 2011. "Payment Schemes in Infinite-Horizon Experimental Games," Working Papers 201118, University of Hawaii at Manoa, Department of Economics.
  14. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
  15. Wheatley, Simon, 1988. "Some tests of the consumption-based asset pricing model," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 193-215, September.
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  17. 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 249-65, April.
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