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“Lucas” in the Laboratory
Author(s) -
ASPAROUHOVA ELENA,
BOSSAERTS PETER,
ROY NILANJAN,
ZAME WILLIAM
Publication year - 2016
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12392
Subject(s) - autarky , consumption (sociology) , economics , dividend , capital asset pricing model , smoothing , econometrics , consumption smoothing , aggregate (composite) , asset (computer security) , microeconomics , financial economics , computer science , keynesian economics , finance , business cycle , social science , materials science , computer security , composite material , sociology , computer vision , welfare , market economy
We study the Lucas asset pricing model in a controlled setting. Participants trade two long‐lived securities in a continuous open‐book system. The experimental design emulates the stationary, infinite‐horizon setting of the model and incentivizes participants to smooth consumption across periods. Consistent with the model, prices align with consumption betas and comove with aggregate dividends, particularly so when risk premia are higher. Trading significantly increases consumption smoothing compared to autarky. Nevertheless, as in field markets, prices are excessively volatile. The noise corrupts traditional generalized method of moment tests. Choices display substantial heterogeneity, with no subject representative for pricing.