A Dynamic General Equilibrium Approach to Asset Pricing Experiments

By John Duffy and Sean Crockett


We report results from a laboratory experiment that implements a consumption-based dynamic general equilibrium model of asset pricing. This work-horse model of the macrofinance literature posits that agents buy and sell assets for the purpose of intertemporally smoothing consumption, and that asset prices are determined by individual risk and time preferences as well as the distribution of income and dividends. The experimental findings are largely supportive of the model’s theoretical predictions. Notably we observe that asset price bubbles, defined as sustained departures of prices from those implied by fundamentals, are infrequent and short-lived. This finding is a stark departure from many recent multi-period asset pricing experiments that lack a consumption-smoothing objective. Indeed, we find that when subjects are induced to adjust shareholdings to smooth consumption, assets typically trade at a discount relative to their expected value and market participation is broad; when the consumption smoothing motivation to trade assets is removed in an otherwise identical economy, assets frequently trade at a premium relative to fundamentals and shareholdings become highly concentrated.

This is the first work I have seen that takes an experimental approach to DGE, so I would have titled it the other way around. Is this a valid approach to validating DGE models? Could we even calibrate models that way?

One Response to A Dynamic General Equilibrium Approach to Asset Pricing Experiments

  1. M.H. says:

    One major problem with calibration of micro-founded macro-models is how to reconcile micro and macro estimates of elasticities. How would the experimental approach help in this?

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