An Experimental Test of the Lucas Asset Pricing Model

Review of Economic Studies, Vol. 86(2), pp. 627-667

81 Pages Posted: 6 May 2010 Last revised: 28 Jan 2020

See all articles by Sean Crockett

Sean Crockett

Chapman University

John Duffy

University of California, Irvine

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: May 3, 2018

Abstract

We implement a dynamic asset pricing experiment in the spirit of Lucas (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 with Smith 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 a 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 behavior explains the departure of prices from fundamental value in the absence of a consumption-smoothing motive for asset trades.

Keywords: Experiment, Asset Pricing, Bubble, Disequilibrium

JEL Classification: C92, D50

Suggested Citation

Crockett, Sean and Duffy, John and Izhakian, Yehuda (Yud), An Experimental Test of the Lucas Asset Pricing Model (May 3, 2018). Review of Economic Studies, Vol. 86(2), pp. 627-667, Available at SSRN: https://ssrn.com/abstract=1600349 or http://dx.doi.org/10.2139/ssrn.1600349

Sean Crockett (Contact Author)

Chapman University ( email )

Orange, CA 92866
United States

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Yehuda (Yud) Izhakian

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

HOME PAGE: http://people.stern.nyu.edu/yizhakia/

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