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Rate of Return Parity in Experimental Asset Markets

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  • Jason Childs
  • Stuart Mestelman

Abstract

This paper applies experimental methods to evaluate the completeness of arbitrage and rate of return parity in simultaneous asset markets in which the assets are denominated in different currencies. Two assets, which return uncertain, but known, dividends in each trading period, are traded over twenty periods, after which the asset has no value. Results indicate that risk neutral rate of return parity is a strong predictor of relative asset prices when assets have common expected dividends and the expected dividends have common variances. The predictive power of risk neutral rate of return parity is reduced as the assets become differentiated.

Suggested Citation

  • Jason Childs & Stuart Mestelman, 2004. "Rate of Return Parity in Experimental Asset Markets," McMaster Experimental Economics Laboratory Publications 2004-07, McMaster University.
    • Handle: RePEc:mcm:mceelp:2004-07
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    File URL: http://socserv.socsci.mcmaster.ca/~mceel/papers/rrp2004jan27.pdf
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    References listed on IDEAS

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    1. Friedman,Daniel & Sunder,Shyam, 1994. "Experimental Methods," Cambridge Books, Cambridge University Press, number 9780521456821, October.
    2. Ayuso, Juan & Restoy, Fernando, 1996. "Interest rate parity and foreign exchange risk premia in the ERM," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 369-382, June.
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    Citations

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    Cited by:

    1. Matthias Weber & John Duffy & Arthur Schram, 2019. "Credit Default Swap Regulation in Experimental Bond Markets," Working Papers on Finance 1905, University of St. Gallen, School of Finance.
    2. Duffy, John & Friedman, Dan & Rabanal, Jean Paul & Rud, Olga, 2022. "The impact of ETF index inclusion on stock prices," UiS Working Papers in Economics and Finance 2022/2, University of Stavanger.
    3. John Duffy & Jean Paul Rabanal & Olga A. Rud, 2022. "Market experiments with multiple assets: A survey," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 18, pages 213-224, Edward Elgar Publishing.
    4. repec:bla:ecinqu:v:51:y:2013:i:3:p:1731-1749 is not listed on IDEAS
    5. Marina Fiedler, 2011. "Experience and Confidence in an Internet‐Based Asset Market Experiment," Southern Economic Journal, John Wiley & Sons, vol. 78(1), pages 30-52, July.
    6. repec:grz:wpsses:2014-01 is not listed on IDEAS
    7. Marina Fiedler, 2011. "Symposium: Experience and Confidence in an Internet-Based Asset Market Experiment," Southern Economic Journal, John Wiley & Sons, vol. 78(1), pages 30-52, July.
    8. Marina Fiedler, 2011. "Symposium: Experience and Confidence in an Internet-Based Asset Market Experiment," Southern Economic Journal, Southern Economic Association, vol. 78(1), pages 30-52, July.
    9. Childs, Jason, 2009. "Rate of return parity and currency crises in experimental asset markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 157-170, February.
    10. Owen Powell & Natalia Shestakova, 2017. "Experimental asset markets: behavior and bubbles," Chapters, in: Morris Altman (ed.), Handbook of Behavioural Economics and Smart Decision-Making, chapter 21, pages 375-391, Edward Elgar Publishing.
    11. Debapriya Jojo Paul & Julia Henker & Sian Owen, 2019. "The aggregate impacts of tournament incentives in experimental asset markets," Experimental Economics, Springer;Economic Science Association, vol. 22(2), pages 441-476, June.

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    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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