Contagion and Return Predictability in Asset Markets: An Experiment with Two Lucas Trees

Research output: Working paperDiscussion paperOther research output

55 Downloads (Pure)

Abstract

Using a laboratory experiment, we investigate whether contagion can emerge between two risky assets, even when their fundamentals are not correlated. To guide our experimental design, we use the ‘Two trees’ asset pricing model developed by Cochrane et al. (2007). 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 autorcorrelations in theshocked asset, (2) a positive contemporaneus correlation between the two assets, and (3) time-series and cross-sectional returnn predictability from the dividend price ratio. In line with the rational foundatin of the model, the model’s predictions have stronger suport in markets with relatively sophisticated agents.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages54
Volume2020-014
Publication statusPublished - 21 Apr 2020

Publication series

NameCentER Discussion Paper
Volume2020-014

Keywords

  • Contagion
  • asset pricing
  • two trees model
  • experimental pricing
  • time series momentum
  • return predictability

Fingerprint Dive into the research topics of 'Contagion and Return Predictability in Asset Markets: An Experiment with Two Lucas Trees'. Together they form a unique fingerprint.

  • Cite this

    Noussair, C. N., & Popescu, A. V. (2020). Contagion and Return Predictability in Asset Markets: An Experiment with Two Lucas Trees. (CentER Discussion Paper; Vol. 2020-014). CentER, Center for Economic Research.