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“Lucas” in the Laboratory

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  • ELENA ASPAROUHOVA
  • PETER BOSSAERTS
  • NILANJAN ROY
  • WILLIAM ZAME

Abstract

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.

Suggested Citation

  • Elena Asparouhova & Peter Bossaerts & Nilanjan Roy & William Zame, 2016. "“Lucas” in the Laboratory," Journal of Finance, American Finance Association, vol. 71(6), pages 2727-2780, December.
    • Handle: RePEc:bla:jfinan:v:71:y:2016:i:6:p:2727-2780
    DOI: 10.1111/jofi.12392
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    3. John Duffy & Janet Hua Jiang & Huan Xie, 2024. "Pricing Indefinitely Lived Assets: Experimental Evidence," Management Science, INFORMS, vol. 70(12), pages 8772-8790, December.
    4. Pedro Antonio Martín-Cervantes & María del Carmen Valls Martínez, 2023. "Unraveling the relationship between betas and ESG scores through the Random Forests methodology," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-29, September.
    5. Te Bao & Edward Halim & Charles N. Noussair & Yohanes E. Riyanto, 2021. "Managerial incentives and stock price dynamics: an experimental approach," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 617-648, June.
    6. Alexander M. Chinco & Samuel M. Hartzmark & Abigail B. Sussman, 2020. "Necessary Evidence For A Risk Factor’s Relevance," NBER Working Papers 27227, National Bureau of Economic Research, Inc.
    7. Fenig, Guidon & Mileva, Mariya & Petersen, Luba, 2018. "Deflating asset price bubbles with leverage constraints and monetary policy," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 1-27.
    8. Hommes, Cars H., 2014. "Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria," Review of Behavioral Economics, now publishers, vol. 1(1-2), pages 75-97, January.
    9. Biais, Bruno & Mariotti, Thomas & Moinas, Sophie & Pouget, Sébastien, 2017. "Asset Pricing and Risk Sharing in Complete Markets: An Experimental Investigation," TSE Working Papers 17-798, Toulouse School of Economics (TSE), revised Aug 2024.
    10. Bohr, Clement E. & Holt, Charles A. & Schubert, Alexandra V., 2019. "Assisted savings for retirement: An experimental analysis," European Economic Review, Elsevier, vol. 119(C), pages 42-54.
    11. Wagner, Alexander F. & Gibson Brandon, Rajna & Sohn, Matthias & Tanner, Carmen, 2018. "Earnings Management and Managerial Honesty: The Investors’ Perspectives," CEPR Discussion Papers 13207, C.E.P.R. Discussion Papers.
    12. Crockett, Sean & Friedman, Daniel & Oprea, Ryan, 2017. "Aggregation and convergence in experimental general equilibrium economies constructed from naturally occurring preferences," Discussion Papers, Research Professorship Market Design: Theory and Pragmatics SP II 2017-501, WZB Berlin Social Science Center.
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    14. Kendall, Chad & Oprea, Ryan, 2018. "Are biased beliefs fit to survive? An experimental test of the market selection hypothesis," Journal of Economic Theory, Elsevier, vol. 176(C), pages 342-371.

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    More about this item

    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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