Comovement and return predictability in asset markets: An experiment with two Lucas trees

Charles N. Noussair, Andreea Victoria Popescu

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)671-687
Number of pages17
JournalJournal of Economic Behavior and Organization
Volume185
DOIs
StatePublished - May 2021

Keywords

  • Asset pricing
  • Comovement
  • Experimental finance
  • Return predictability
  • Time series momentum
  • Two trees model

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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