Bossaerts, P. and C. Plott [1999], "Basic Principles of Asset Pricing Theory: Evidence from Large-Scale Experimental Financial Markets," Caltech working paper.  Home/Search   Document Details and Download   Summary   Related Articles   Check

....and are paid slightly above the equivalent to the minimum salary per hour. A number of experiments tried to go beyond the basic procedure of experimenting. The Iowa Electronic Markets may be the best known of them. The advent of Internet has allowed some experimenters to move out of the lab. Bossaerts and Plott (1999), for instance, have run several experiments using the Internet as a medium to collect experimental data, subjects being able to lock in any time they want within a range of several days. LuckingReiley (1999) and List and Lucking Reiley (1999) test different auction mechanisms selling sports cards ....

Bossaerts, Peter and Charles R. Plott (1999). "Basic Principles of Asset Pricing Theory: Evidence From Large Scale Experiments." California Institute of Technology, July.

.... the Capital Asset Pricing Model (CAPM) While it relies on very specific assumptions about preferences, it has turned out to be 5 extremely useful in analyzing prices and risk sharing in the large scale experimental financial markets on which the empirical study later in this paper relies (see [5, 6]) Moreover, the CAPM is very much the prototype of asset pricing theory: its main pricing implication (that expected excess return will be proportional to covariance with aggregate risk) and its main risk sharing implication (that all investors should hold the same portfolio(s) of risky ....

....setup allows us to estimate excess demand with little error. Estimation of excess demand in field data is far more di#cult, absent knowledge of investors beliefs, a good model for attitudes towards risk, and the total supply of assets. The three asset experiments are described in more detail in [5] (focusing on pricing) 6] focusing on allocations) and [7] linking prices and allocations) The Appendix also discusses evidence from 4 four asset experiments. Except for the number of assets and the payo# matrix, the setup for all experiments was the same. A continuous open book trading ....

Bossaerts, P. and C. Plott [1999], "Basic Principles of Asset Pricing Theory: Evidence from Large-Scale Experimental Financial Markets," Caltech working paper.

....Markets Through Combined Value Trading Mechanisms # Peter Bossaerts, Leslie Fine and John Ledyard 1 Introduction This research explores the key result in [5] that thin financial markets (markets with only a few agents) fail to completely equilibrate. The result in [5] contrasts with that in [4], where thick financial markets were found to fully equilibrate. 5] conjectured that a certain type of market risk causes convergence problems in thin financial markets. To implement improved portfolio positions, agents have to coordinate their actions across several parallel, unconnected ....

....It might be thought, therefore, that experimental financial markets do not provide su#cient incentive, and that observed failure to equilibrate is not surprising or significant. If incentives are too little, however, one wonders why thick experimental financial markets do fully equilibrate (see [4]) The only di#erence between them and the thin financial markets in [5] is numbers: only 6 to 15 sub # Financial support was provided by The California Institute of Technology, The New Millennium Project of the Jet Propulsion Laboratory, and by the IBM Fellowship in Experimental Economics. The ....

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Bossaerts, P. and C. Plott (2000): "Basic Principles Of Asset Pricing Theory: Evidence From Large-Scale Experimental Financial Markets," Caltech working paper.

....The remainder of this paper explains these findings in detail. The next section describes our earlier uncertainty experiments and the predictions that economic theory makes about the pricing and risk sharing in these experiments. Section 3 presents the price allocation paradox first discovered in [5]. In Section 4, general equilibrium theory is extended to allow for perturbation terms in individual demands. Under specific circumstances, these perturbation terms explain the price allocation paradox. To determine the nature of the perturbation terms, Section 5 describes a set of experiments ....

....5 implemented on the uncertainty experiments in Section 8. Section 9 concludes. 2 Description Of The Financial Markets Experiments Bossaerts and Plott have carried out a series of experiments designed to test the predictions of general equilibrium theory about risk sharing and risk pricing (see [5]) In these experiments, using continuous double auctions through the Caltech Marketscape web based program 1 , there were two risky securities A, B in addition to the riskless security (Note) and limited cash. Payo#s (dividends) on the risky securities depend on the state variable. Three ....

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Bossaerts, P. and C. Plott [1999], "Basic Principles of Asset Pricing Theory: Evidence from Large-Scale Experimental Financial Markets," Caltech working paper

....preferences, the CAPM holds in equilibrium. Whence our focus on the CAPM. See also Judd and Guu (2000) for theoretical evidence that the CAPM obtains when risk is small. In large scale (20 to 60 subjects) experimental financial markets, the CAPM explains many facets of pricing and trading. See Bossaerts and Plott (1999), Bossaerts, Plott and Zame (2000) Prices generally fully equilibrate to the CAPM, and, while individual holdings are quite noisy, transaction by transaction price changes are clearly driven by a mean variance optimal aggregate demand. It is not obvious that these findings translate to thin ....

....of this coordination e#ort is important to explain the experimental results. After that, interest rates gradually declined. Far cleaner evidence for the cyclical e#ect of this cash in advance constraint on the interest rate could be found in the large scale experiments, though. See Bossaerts and Plott (1999). As far as allocations is concerned, the CAPM predicts that investors should all trade up to mean variance optimal portfolios. In equilibrium, the market portfolio will be the component of any mean variance optimal portfolio that is only invested in risky securities. Away from equilibrium, ....

[Article contains additional citation context not shown here]

Bossaerts, P. and C. Plott (1999): "Basic Principles of Asset Pricing Theory: Evidence from Large-Scale Experimental Financial Markets," Caltech working paper.

.... the Capital Asset Pricing Model (CAPM) While it relies on very specific assumptions about preferences, it has turned out to be extremely useful in analyzing prices and risk sharing in the large scale experimental financial markets on which the empirical study later in this paper relies (see [2, 3]) Moreover, the CAPM is very much the prototype of asset pricing theory: its main pricing implication (that expected excess return will be proportional to covariance with aggregate risk) and its main risk sharing implication (that all investors should hold the same portfolio(s) of risky ....

....supply) In fact, it has been tradition in empirical finance to just treat all observations as if they are snapshots of a dynamic equilibrium, ignoring the very premise underlying this paper, namely, that markets may at times be in disequilibrium. The experiments are described in more detail in [2] (focusing on pricing) and [3] focusing on allocations) Briefly, using continuous double auctions through the Caltech Marketscape web based program 8 , there were two risky securities A, B in addition to the riskless security C, and limited cash. Payo#s (dividends) on the risky securities ....

[Article contains additional citation context not shown here]

Bossaerts, P. and C. Plott [1999], "Basic Principles of Asset Pricing Theory: Evidence from Large-Scale Experimental Financial Markets," Caltech working paper.

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