Consumption Smoothing and Price Predictability with Heterogeneous Traders in Experimental Asset Markets

Halim, Edward and Riyanto, Yohanes Eko and Roy, Nilanjan (2016): Consumption Smoothing and Price Predictability with Heterogeneous Traders in Experimental Asset Markets.

Abstract

We design an experiment to study the determinants of price movement and consumption smoothing behavior across asset markets populated with varying proportion of traders having induced motive to smooth consumption. The extent of over-pricing is higher when traders with no induced motive to trade are present. Price predictability is higher in the presence of traders with induced motive to smooth consumption. Participants motivated to minimize consumption fluctuations are able to do so with the inclination being more for those having lower initial endowment. With fixed prices, traders are able to smooth consumption not only intertemporally but also across dividend states. Within the dynamic asset pricing framework, our design also allows us to compare complete and incomplete asset markets. We find that prices are comparatively well-behaved and consumption smoothing "works" better in the setting where the asset market is complete than under incomplete markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Asset Pricing, Uncertainty, Experimental Economics, Price Predictability, Consumption Smoothing, Intertemporal Choice, Incomplete Asset Markets
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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