Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments

64 Pages Posted: 8 May 2007

See all articles by Peter Bossaerts

Peter Bossaerts

University of Melbourne - Department of Finance

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

William R. Zame

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

Date Written: March 12, 2007

Abstract

Many tests of asset pricing models address only the pricing predictions - but these pricing predictions rest on portfolio choice predictions which seem obviously wrong. This paper suggests a new approach to asset pricing and portfolio choices, based on unobserved heterogeneity. This approach yields the standard pricing conclusions of classical models but is consistent with very different portfolio choices. Novel econometric tests link the price and portfolio predictions and take account of the general equilibrium effects of sample-size bias. The paper works through the approach in detail for the case of the classical CAPM, producing a model called CAPM+. When these econometric tests are applied to data generated by large-scale laboratory asset markets which reveal both prices and portfolio choices, CAPM+ is not rejected.

Keywords: experimental finance, experimental asset markets, risk aversion

JEL Classification: C91, C92, D51, G11, G12

Suggested Citation

Bossaerts, Peter L. and Plott, Charles R. and Zame, William R., Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments (March 12, 2007). Swiss Finance Institute Research Paper No. 07-05. Available at SSRN: https://ssrn.com/abstract=985072 or http://dx.doi.org/10.2139/ssrn.985072

Peter L. Bossaerts (Contact Author)

University of Melbourne - Department of Finance ( email )

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

HOME PAGE: http://bmmlab.org

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

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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