Journal article

Prices and portfolio choices in financial markets: Theory, econometrics, experiments

Many tests of asset-pricing models address only the pricing predictions, but these pricing predictions rest on portfolio choice predictions that 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 into account the general equilibrium effects of sample-size bias. This paper works through the approach in detail for the case of the classical capital asset pricing model (CAPM), producing a model called CAPM+?. When these econometric tests are applied to data generated by large-scale laboratory asset markets that reveal both prices and portfolio choices, CAPM+?is not rejected. © The Econometric Society 2007.

    Keywords: Experimental asset markets ; Experimental finance ; Risk aversion


    Division of the Humanities and Social Sciences, California Institute of Technology, Baxter Hall, 1200 E. California Blvd., Pasadena, CA 91125, United States Center for Economic Policy Research, London, United Kingdom Swiss Finance Institute, Zurich, Switzerland Dept. of Economics, University of California, Los Angeles, Bunche Hall, Los Angeles, CA 90095, United States California Institute of Technology, Pasadena, CA 91125, United States

    TY - JOUR

    Export Date: 10 March 2008

    Source: Scopus


    Record created on 2008-03-12, modified on 2017-05-12


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