'Lucas' in the Laboratory

52 Pages Posted: 25 May 2013

See all articles by Elena N. Asparouhova

Elena N. Asparouhova

University of Utah - David Eccles School of Business

Peter Bossaerts

University of Melbourne - Department of Finance

Nilanjan Roy

California Institute of Technology

William R. Zame

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: May 2013

Abstract

This paper reports on experimental tests of an instantiation of the Lucas asset pricing model with heterogeneous agents and time-varying private income streams. Central features of the model (infinite horizon, perishability of consumption, stationarity) present difficult challenges and require a novel experimental design. The experimental evidence provides broad support for the qualitative pricing and consumption predictions of the model (prices move with fundamentals, agents smooth consumption) but sharp differences from the quantitative predictions emerge (asset prices display excess volatility, agents do not hedge price risk). Generalized Method of Moments (GMM) tests of the stochastic Euler equations yield very different conclusions depending on the instruments chosen. It is suggested that the qualitative agreement with and quantitative deviation from theoretical predictions arise from agents' expectations about future prices, which are almost self-fulfilling and yet very different from what they would need to be if they were exactly self-fulfilling (as the Lucas model requires).

Suggested Citation

Asparouhova, Elena N. and Bossaerts, Peter L. and Roy, Nilanjan and Zame, William R., 'Lucas' in the Laboratory (May 2013). NBER Working Paper No. w19068, Available at SSRN: https://ssrn.com/abstract=2270067

Elena N. Asparouhova (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Peter L. Bossaerts

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

Nilanjan Roy

California Institute of Technology ( email )

Pasadena, CA 91125
United States

William R. Zame

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-206-9463 (Phone)

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