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.

Published in:
Econometrica, 75, 4, 993-1038
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
Export Date: 10 March 2008
Source: Scopus
Other identifiers:
Scopus: 2-s2.0-34250321751

 Record created 2008-03-12, last modified 2018-03-17

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