An Experimental Test of the Lucas Asset Pricing Model. (7th July 2018)

• Record Type: Journal Article
• Authors: Crockett, Sean; Duffy, John; Izhakian, Yehuda
• Is Part Of: Review of economic studies. Volume 86:Number 2(2019)
• Page Start: 627
• Page End: 667
• Publication Date: 2018-07-07
• Subjects: Asset pricing -- Lucas Tree Model -- Experimental economics -- General equilibrium -- Intertemporal choice -- Macrofinance -- Consumption smoothing; C90 -- D51 -- D91 -- G12; Economics -- Periodicals; 330
• DOI: 10.1093/restud/rdy035
• Languages: English
• ISSNs: 0034-6527

Abstract

Abstract: We implement a dynamic asset pricing experiment in the spirit ofLucas (1978) with storable assets and non-storable cash. In the first treatment, we impose diminishing marginal returns to cash to incentivize consumption smoothing across periods. We find that subjects use the asset to smooth consumption, although the asset trades at a discount relative to the risk-neutral fundamental price. This under-pricing is a departure from the asset price "bubbles" observed in the large experimental asset pricing literature originating withSmith et al . (1988) and can be rationalized by considering subjects' risk aversion with respect to uncertain money earnings. In a second treatment, with no induced motivation for trade à la the Smith et al. design, we find that the asset trades at a premium relative to its expected value and that shareholdings are highly concentrated. Elimination of asset price uncertainty in additional experimental treatments serves to reinforce the same observations, and suggests that speculative behaviour explains the departure of prices from fundamental value in the absence of a consumption-smoothing motive for asset trades.