TY - JOUR
T1 - Comovement and return predictability in asset markets
T2 - An experiment with two Lucas trees
AU - Noussair, Charles N.
AU - Popescu, Andreea Victoria
N1 - Funding Information:
We have benefitted from discussions with Peter Bossaerts, Tibor Neugebauer, and participants at the 2020 ASSA, the 2019 IAREP/SABE, the 2019 Experimental Finance, and the 2018 Theory and Experiments in Monetary Economics conferences, the 2019 TIBER Symposium at Tilburg University, and seminars at Tilburg University and University College London. Funding for the project was provided by CentER at Tilburg University and the Economic Science Laboratory at the University of Arizona.
Funding Information:
We have benefitted from discussions with Peter Bossaerts, Tibor Neugebauer, and participants at the 2020 ASSA, the 2019 IAREP/SABE, the 2019 Experimental Finance, and the 2018 Theory and Experiments in Monetary Economics conferences, the 2019 TIBER Symposium at Tilburg University, and seminars at Tilburg University and University College London. Funding for the project was provided by CentER at Tilburg University and the Economic Science Laboratory at the University of Arizona.
Publisher Copyright:
© 2021 Elsevier B.V.
PY - 2021/5
Y1 - 2021/5
N2 - Using a laboratory experiment, we investigate whether comovement can emerge between two risky assets, despite their fundamentals not being correlated. The ‘Two trees’ asset pricing model developed by Cochrane et al. (2007) guides our experimental design and its predictions serve as our source of hypotheses. The model makes time-series and cross-section return predictions following a shock to one of the two assets’ dividend distributions. As the model predicts, we observe (1) positive contemporaneous correlation between the two assets, (2) positive autocorrelation in the shocked asset, and (3) time-series and cross-sectional return predictability from the dividend-price ratio. In line with the rational foundations of the model, the model's predictions have stronger support in markets with relatively sophisticated agents.
AB - Using a laboratory experiment, we investigate whether comovement can emerge between two risky assets, despite their fundamentals not being correlated. The ‘Two trees’ asset pricing model developed by Cochrane et al. (2007) guides our experimental design and its predictions serve as our source of hypotheses. The model makes time-series and cross-section return predictions following a shock to one of the two assets’ dividend distributions. As the model predicts, we observe (1) positive contemporaneous correlation between the two assets, (2) positive autocorrelation in the shocked asset, and (3) time-series and cross-sectional return predictability from the dividend-price ratio. In line with the rational foundations of the model, the model's predictions have stronger support in markets with relatively sophisticated agents.
KW - Asset pricing
KW - Comovement
KW - Experimental finance
KW - Return predictability
KW - Time series momentum
KW - Two trees model
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U2 - 10.1016/j.jebo.2021.03.012
DO - 10.1016/j.jebo.2021.03.012
M3 - Article
AN - SCOPUS:85103754144
SN - 0167-2681
VL - 185
SP - 671
EP - 687
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
ER -