Dynamically Complete Experimental Asset Markets

Seminario Micro

Debrah Meloso

Bocconi University

9-Dec-2013

Seminar 3 – 14:30

We propose a novel and carefully-designed experimental setup that allows for the direct comparison between individual wealth (final distribution of risk) and state prices, between a static market and its equivalent dynamically-complete market. A dynamic market is equivalent to a static one if they share the same aggregate and idiosyncratic risk and, hence, correspond to the same Arrow-Debreu economy. We find that significant differences persist between the two markets even after subjects become experienced with both types of market. Nonetheless, we find evidence of convergence to the static equilibrium in the dynamic markets, driven mainly by the trades of a few subjects that generate a vast majority of security turnover. In dynamic markets we find that in early periods subjects do not anchor on past period prices. Instead, they display behavior consistent with probabilistic price beliefs and price risk aversion.