### Abstract

Original language | English |
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Publisher | SSRN |

Number of pages | 55 |

DOIs | |

Publication status | Published - 6 Sep 2019 |

### Fingerprint

### Keywords

- Contagion
- Asset Pricing
- Two Trees Model
- Experimental Finance
- Time Series Momentum
- Return Predictability

### Cite this

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**Contagion and Return Predictability in Asset Markets : An Experiment With Two Lucas Trees.** / Noussair, Charles; Popescu, Andreea Victoria.

Research output: Working paper › Other research output

TY - UNPB

T1 - Contagion and Return Predictability in Asset Markets

T2 - An Experiment With Two Lucas Trees

AU - Noussair, Charles

AU - Popescu, Andreea Victoria

PY - 2019/9/6

Y1 - 2019/9/6

N2 - Using a laboratory experiment, we investigate whether contagion can emerge between two risky assets despite an absence of correlation in their fundamentals. To guide our experimental design, we use the ‘Two trees’ asset pricing model developed by Cochrane, Longstaff and Santa-Clara (2007). We draw on the model to make predictions regarding changes in the time-series and cross-section of returns in response to fundamental value shocks. We observe positive autocorrelation in the shocked asset, and a positive contemporaneous correlation between assets, as the model predicts. The dividend-price ratio forecasts the returns of risky assets, both in the time series and in the cross-section. There is more support for the model’s predictions in markets in which traders have greater cognitive ability.

AB - Using a laboratory experiment, we investigate whether contagion can emerge between two risky assets despite an absence of correlation in their fundamentals. To guide our experimental design, we use the ‘Two trees’ asset pricing model developed by Cochrane, Longstaff and Santa-Clara (2007). We draw on the model to make predictions regarding changes in the time-series and cross-section of returns in response to fundamental value shocks. We observe positive autocorrelation in the shocked asset, and a positive contemporaneous correlation between assets, as the model predicts. The dividend-price ratio forecasts the returns of risky assets, both in the time series and in the cross-section. There is more support for the model’s predictions in markets in which traders have greater cognitive ability.

KW - Contagion

KW - Asset Pricing

KW - Two Trees Model

KW - Experimental Finance

KW - Time Series Momentum

KW - Return Predictability

U2 - 10.2139/ssrn.3445324

DO - 10.2139/ssrn.3445324

M3 - Working paper

BT - Contagion and Return Predictability in Asset Markets

PB - SSRN

ER -