[ { "id": "authors:h8b1v-76536", "collection": "authors", "collection_id": "h8b1v-76536", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20200727-111303655", "type": "publication_workingpaper", "title": "Price Formation in Multiple, Simultaneous Continuous Double Auctions, with Implications for Asset Pricing", "author": [ { "family_name": "Asparouhova", "given_name": "Elena", "clpid": "Asparouhova-E" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Ledyard", "given_name": "John O.", "clpid": "Ledyard-J-O" } ], "abstract": "We propose a Marshallian model for price and allocation adjustments in parallel continuous double auctions. Agents quote prices that they expect will maximize local utility improvements. The process generates Pareto optimal allocations in the limit. In experiments designed to induce CAPM equilibrium, price and allocation dynamics are in line with the model's predictions. Walrasian aggregate excess demands do not provide additional predictive power. We identify, theoretically and empirically, a portfolio that is closer to mean-variance optimal throughout equilibration. This portfolio can serve as a benchmark for asset returns even if markets are not in equilibrium, unlike the market portfolio, which only works at equilibrium. The theory also has implications for momentum, volume and liquidity.", "doi": "10.7907/h8b1v-76536", "publisher": "California Institute of Technology", "publication_date": "2020-07-27" }, { "id": "authors:yk4m6-yrv98", "collection": "authors", "collection_id": "yk4m6-yrv98", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170808-135334937", "type": "publication_workingpaper", "title": "Inducing Liquidity in Thin Financial Markets through Combined-Value Trading Mechanisms", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Fine", "given_name": "Leslie", "clpid": "Fine-Leslie" }, { "family_name": "Ledyard", "given_name": "John O.", "clpid": "Ledyard-J-O" } ], "abstract": "Previous experimental research has shown that thin financial markets fail to fully equilibrate, in contrast with thick markets. A specific type of market risk is conjectured to be the reason, namely, the risk of partial execution of desired portfolio rearrangements in a system of parallel, unconnected double auction markets. This market risk causes liquidity to dry up before equilibrium is reached. To verify the conjecture, we organized markets directly as a portfolio trading mechanism, allowing agents to better coordinate their orders across securities. The mechanism is an implementation of the combined-value trading (CVT) system. We present evidence that our portfolio trading mechanism facilitates equilibration to the same extent as thick markets do. Like in thick markets, the emergence of equilibrium pricing cannot be attributed to chance. Inspection of order submission and trade activity reveals that subjects manage to exploit the direct linkages between markets presented by the CVT system.", "doi": "10.7907/yk4m6-yrv98", "publisher": "California Institute of Technology", "publication_date": "2000-08" }, { "id": "authors:dn4fv-8ve95", "collection": "authors", "collection_id": "dn4fv-8ve95", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170808-155743909", "type": "publication_workingpaper", "title": "Has The Cross-Section of Average Returns Always Been the Same? Evidence from Germany, 1881-1913", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Fohlin", "given_name": "Caroline", "orcid": "0000-0002-1380-2788", "clpid": "Fohlin-C" } ], "abstract": "The cross-section of average annual returns on German common stock in the period of 1881-1913 exhibits several of the patterns that have been observed in more recent U.S. data. Market beta is hardly important, and its explanatory power is swamped by size and the ratio of book value to market value. A book-to-market risk measure (covariance with a portfolio long in high book-to-market firms and short in low book-to-market firms) has no effect on the explanatory power of the book-to-market characteristic. But the size effect appears to be caused by selection bias in the sample. And the book-to-market effect is opposite that of the recent U.S. experience (and, hence, can certainly not be attributed to selection bias). Finally, a momentum portfolio constructed on the basis of the error of the basic 3-characteristic model (market beta, size and book-to-market) does not generate significant returns. These findings highlight the variability in the power of certain characteristics in explaining the cross section of average returns.", "doi": "10.7907/dn4fv-8ve95", "publisher": "California Institute of Technology", "publication_date": "2000-07" }, { "id": "authors:eqsbn-kbz89", "collection": "authors", "collection_id": "eqsbn-kbz89", "cite_using_url": "https://authors.library.caltech.edu/records/eqsbn-kbz89", "type": "publication_workingpaper", "title": "Basic Principles of Asset Pricing Theory: Evidence from Large-scale Experimental Financial Markets", "author": [ { "family_name": "Bossaerts", "given_name": "Peter L.", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Plott", "given_name": "Charles R.", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "abstract": "We report on two sets of large-scale financial markets experiments that were designed to test the central proposition of modern asset pricing theory, namely, that risk premia are solely determined by covariance with aggregate risk. We analyze the pricing within the framework suggested by two theoretical models, namely, the (general) Arrow and Debreu's complete-markets model, and the (more specific) Sharpe-Lintner-Mossin Capital Asset Pricing Model (CAPM). Completeness of the asset payoff structure justifies the former; the small (albeit non-negligible) risks justifies the latter. We observe swift convergence towards price patterns predicted in the Arrow and Debreu and CAPM models. This observation is significant, because subjects always lack the information to deliberately set asset prices using either model. In the first set of experiments, however, equilibration is not always robust, with markets temporarily veering away. We conjecture that this reflects our failure to control subject' beliefs about the temporal independence of the payouts. Confirming this conjecture, the anomaly disappears in a second set of experiments, where states were drawn without replacement. We formally test whether CAPM and Arrow\u2013Debreu equilibrium can be used to predict price movements in our experiments and confirm the hypothesis. When multiplying the subject payout tenfold (in real terms), to US $ 500 on average for a 3-h experiment, the results are unaltered, except for an increase in the recorded risk premia.", "doi": "10.7907/eqsbn-kbz89", "publisher": "California Institute of Technology", "publication_date": "2000-02" }, { "id": "authors:q9mym-vse18", "collection": "authors", "collection_id": "q9mym-vse18", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20171129-162359021", "type": "publication_workingpaper", "title": "Price Discovery in Financial Markets: The Case of the CAPM", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Kleiman", "given_name": "Daniel", "clpid": "Kleiman-D" }, { "family_name": "Plott", "given_name": "Charles R.", "orcid": "0000-0001-8363-3628", "clpid": "Plott-C-R" } ], "abstract": "We report on experiments of simple, repeated asset markets in two risky securities and one risk-free security, set up to test the Capital Asset Pricing Model (CAPM), which embeds the two most essential principles of modern asset pricing theory, namely, (i) financial markets equilibrate, (ii) in equilibrium, risk premia are solely determined by covariance with aggregate risk. Slow, but steady convergence towards the CAPM is discovered. The convergence process, however, halts before reaching the actual equilibrium. There is ample evidence that subjects gradually move up in mean-variance space, in accordance with the CAPM. Yet, adjustment stops as if the remaining trading time was insufficient to complete all the transactions that are needed to guarantee improvements in positions. We conjecture that this is due to subjects' hesitance in the face of market thinness. Because the convergence process halts, statistical tests reject the CAPM.", "doi": "10.7907/q9mym-vse18", "publisher": "California Institute of Technology", "publication_date": "1999-04-19" }, { "id": "authors:qz81g-90134", "collection": "authors", "collection_id": "qz81g-90134", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170814-141831110", "type": "publication_workingpaper", "title": "IPO Post-Issue Markets: Questionable Predilections But Diligent Learners?", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "Efficiency in the IPO (Initial Public Offering) aftermarket is tested without imposing any restrictions on the priors about potential default at the issue date. Merging Ritter's extended dataset (which covers the period 1975-84) with the CRSP tapes, IPOs are followed up to ten years after issue. Across all IPOs, or when stratifying IPOs according to issue underpricing, industry affiliation or rank of entry in an industry, little evidence against rational price behavior is found. In contrast, the market clearly over-reacts to information about the eventual fate of low-priced issues. A suggestive relationship between irrational price behavior and subsequent takeover activity is uncovered.", "doi": "10.7907/qz81g-90134", "publisher": "California Institute of Technology", "publication_date": "1997-08" }, { "id": "authors:1jcq6-r2h20", "collection": "authors", "collection_id": "1jcq6-r2h20", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170815-145720985", "type": "publication_workingpaper", "title": "Expectations and Learning in Iowa", "author": [ { "family_name": "Bondarenko", "given_name": "Oleg", "clpid": "Bondarenko-O" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "We study the rationality of learning and the biases in expectations in the Iowa Experimental Markets. Using novel tests developed in Bossaerts [1996], learning in the Iowa winner-take-all markets is found to be in accordance with the rules of conditional probability (Bayes' law). Hence, participants correctly update their beliefs using the available information. There is evidence, however, that beliefs do not satisfy the restrictions of rational expectations that they reflect the factual distribution of outcomes.", "doi": "10.7907/1jcq6-r2h20", "publisher": "California Institute of Technology", "publication_date": "1997-04" }, { "id": "authors:xr38e-amk77", "collection": "authors", "collection_id": "xr38e-amk77", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170814-140850379", "type": "publication_workingpaper", "title": "The Dynamics Of Equity Prices In Fallible Markets", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "In an efficient securities market, prices correctly reflect news about future payoffs. This paper argues that there are two aspects to correctness: (i) correct updating of beliefs from news, (ii) correct prior beliefs. Traditionally, empirical research has implicitly insisted on both. Lucas' rational expectations equilibrium theory also assumes both, explicitly. Nevertheless, rationality requires only the former, but not the latter. This paper develops restrictions on the random behavior of prices of equity-like contracts when (i) is maintained, but the market may have mistaken priors about the likelihood of the bankruptcy state, in violation of (ii). The restrictions are cast in the form of familiar martingale difference results. They do not necessarily restrict returns as traditionally computed, however. Most importantly, the restrictions appear only when the empiricist deliberately imposes a selection bias. In particular, the price histories of securities that are in the money at the terminal date are to be separated from those of securities that end out of the money (i.e., in the bankruptcy state). As a result, this paper also demonstrates that something can be learned about market efficiency from samples subject to survivorship bias or the Peso problem.", "doi": "10.7907/xr38e-amk77", "publisher": "California Institute of Technology", "publication_date": "1997-01" }, { "id": "authors:73szt-nd743", "collection": "authors", "collection_id": "73szt-nd743", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170815-164236183", "type": "publication_workingpaper", "title": "Arbitrage-Based Pricing When Volatility is Stochastic", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Ghysels", "given_name": "Eric", "clpid": "Ghysels-E" }, { "family_name": "Gouri\u00e9roux", "given_name": "Christian", "clpid": "Gouri\u00e9roux-C" } ], "abstract": "In one of the early attempts to model stochastic volatility, Clark [1973] conjectured that the size of asset price movements is tied to the rate at which transactions occur. To formally analyze the econometric implications, he distinguished between transaction time and calendar time. The present paper exploits Clark's strategy for a different purpose, namely, asset pricing. It studies arbitrage-based pricing in economies where: (i) trade takes place in transaction time, (ii) there is a single state variable whose transaction time price path is binomial, (iii) there are risk-free bonds with calendar-time maturities, and (iv) the relation between transaction time and calendar time is stochastic. The state variable could be interpreted in various ways. E.g., it could be the price of a share of stock, as in Black and Scholes [1973], or a factor that summarizes changes in the investment opportunity set, as in Cox, Ingersoll and Ross [1985] or one that drives changes in the term structure of interest rates (Ho and Lee [1986], Heath, Jarrow and Morton [1992]). Property (iv) generally introduces stochastic volatility in the process of the state variable when recorded in calendar time. The paper investigates the pricing of derivative securities with calendar-time maturities. The restrictions obtained in Merton [1973] using simple buy-and-hold arbitrage portfolio arguments do not necessarily obtain. Conditions are derived for all derivatives to be priced by dynamic arbitrage, i.e., for market completeness in the sense of Harrison and Pliska [1981]. A particular class of stationary economies where markets are indeed complete is characterized.", "doi": "10.7907/73szt-nd743", "publisher": "California Institute of Technology", "publication_date": "1996-07" }, { "id": "authors:de6dw-zq306", "collection": "authors", "collection_id": "de6dw-zq306", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170816-162131145", "type": "publication_workingpaper", "title": "Martingale Restrictions on Equilibrium Prices of Arrow-Debreu Securities Under Rational Expectations and Consistent Beliefs", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Consider the Rational Expectations price history of an Arrow-Debreu security that matures in the money: p1; p2; \u2026; pr. Past information can be used to predict the return pt+1 - pt) = pt. Now consider a simple alternative performance measure: (pt+1 - pt)=pt+1. It differs from the return only in that the future price is used as basis. This variable cannot be forecasted from past information. The result obtains even if investors' beliefs are biased, i.e., prices are not set in a Rational Expectations Equilibrium (REE). It depends only on investors' using the rules of conditional probability to process information. More precisely, the result continues to hold in the Bayesian Equilibrium with Consistent Beliefs (CBE) introduced by Harsanyi [1967]. Many related results are proved in this paper and extensions to the pricing of equity subject to bankruptcy risk are discussed.", "doi": "10.7907/de6dw-zq306", "publisher": "California Institute of Technology", "publication_date": "1996-05" }, { "id": "authors:c3h0d-2kp48", "collection": "authors", "collection_id": "c3h0d-2kp48", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170817-134647024", "type": "publication_workingpaper", "title": "Rational Price Discovery In Experimental And Field Data", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The methodology of tests for martingale properties in return series is analyzed. Martingale results obtain frequently in finance. One case is focused on here, namely, rational price discovery. Price discovery is the process by which a market moves towards a new equilibrium after a major event. It is rational if price changes cannot be predicted from commonly available information. The price discovery process, however, cannot be assumed stationary. Hence, to avoid false inference in the presence of nonstationarities, event studies of field data have been advocating the use of cross-sectional information in the computation of test statistics. Under the martingale hypothesis, however, this inference strategy is shown to add little except if higher moments of the return series do not exist. On the contrary, the cross-sectional approach may even be invalid if there is cross-sectional heterogeneity in the price discovery process. The time series statistic of Patell (1976], originally suggested in the context of i.i.d. time series but cross-sectional heterosceclasticity, may be preferable. It will not provide valid inference either, if higher serial correlation coincides with higher volatility. Unfortunately, this appears to be the case in the dataset which is used in the paper to illustrate the methodological issues, namely, transaction price changes from experiments on continuous double auctions with stochastic private valuations.", "doi": "10.7907/c3h0d-2kp48", "publisher": "California Institute of Technology", "publication_date": "1995-07" }, { "id": "authors:ptdpn-hf013", "collection": "authors", "collection_id": "ptdpn-hf013", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170824-150038586", "type": "publication_workingpaper", "title": "Testing The Mean-Variance Efficiency of Well-Diversified Portfolios in Very Large Cross-Sections", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "We propose a new way of testing the mean-variance efficiency of well-diversified portfolios that exploits the cross-sectional size of typical financial datasets. The methodology consists of a sequence of simple tests, the results of which are aggregated in a statistic. This statistic is shown to be asymptotically standard normally distributed, despite dependence, in cross-section and over time, of the idiosyncratic risk. We investigate theoretically the asymptotic power of our test against the alternative that the well-diversified portfolio is not mean-variance efficient. By construction, our procedure is more powerful than standard tests of mean-variance efficiency that combine the assets in the cross-section into a limited set of (arguably) arbitrary portfolios. Even in cases where the latter has zero power, it can have unit asymptotic power. The incremental power is evidenced in tests of the mean-variance efficiency of the value weighted portfolio of common stock listed on the NYSE and AMEX. Unlike previously thought, however, the selection bias caused by including only continuously traded securities in the test is found to be important. By running the test in a case where it is known to have zero power, we are able to empirically confirm the correctness of the theoretical asymptotic properties of our statistic.", "doi": "10.7907/ptdpn-hf013", "publisher": "California Institute of Technology", "publication_date": "1993-08" }, { "id": "authors:nz7b5-k7z07", "collection": "authors", "collection_id": "nz7b5-k7z07", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170825-151049012", "type": "publication_workingpaper", "title": "Transaction Prices When Insiders Trade Portfolios", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Statistical properties of transaction prices are investigated in the context of a multi-asset extension of Kyle [1985]. Under the restriction that market makers cannot condition prices on volume in other markets, Kyle's model is shown to be consistent with well-documented lack of predictability of individual asset prices, positive autocorrelation of index returns, and low cross-sectional covariance. The covariance estimator of Cohen, e.a. [1983] provides the right estimates of the \"true\" covariance. However, Kyle's model cannot explain the asymmetry and rank deficiency of the matrix of first-order autocovariances. Asymmetry obtains when the insider limits his strategies to trading a set of pre-determined portfolios. If these portfolios are well-diversified, the matrix of first-order autocovariances is asymptotically rank-deficient. If the insider uses only one portfolio (as when \"timing the market\"), its asymptotic rank equals one, conform to the empirical results in Gibbons and Ferson [1985].", "doi": "10.7907/nz7b5-k7z07", "publisher": "California Institute of Technology", "publication_date": "1993-02" }, { "id": "authors:ycpe4-67t20", "collection": "authors", "collection_id": "ycpe4-67t20", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170825-155217920", "type": "publication_workingpaper", "title": "Asset Prices and Volume in a Beauty Contest", "author": [ { "family_name": "Biais", "given_name": "Bruno", "clpid": "Biais-B" }, { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The dynamics of prices and volume are investigated in a market where agents disagree about the fundamental value of the asset. The distribution of beliefs is not taken to be common knowledge. The resulting infinite hierarchy of beliefs is solved by making the assumption that, prior to the first trading round, agents consider themselves to be average. Speculation is shown to generate substantial volatility and volume, bid and transaction price predictability, rich patterns of volume, and an inverse relationship between changes in transaction prices and the number of trading rounds without volume.", "doi": "10.7907/ycpe4-67t20", "publisher": "California Institute of Technology", "publication_date": "1993-01" }, { "id": "authors:jek4e-m2m07", "collection": "authors", "collection_id": "jek4e-m2m07", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170829-144805279", "type": "publication_workingpaper", "title": "Lower Bounds on Asset Return Comovement", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "Under standard assumptions from dynamic asset pricing theory (value additivity, complete markets, rational expectations, and strict stationarity and ergodicity) and absence of arbitrage, lower bounds on the conditional and unconditional cross-moments of the returns on two assets a.re derived. They a.re expressed in terms of the second moment of a linear combination of option premia. The restrictions a.re probed with data from the foreign exchange market covering the period 1983-1991. Assuming that the value of the economy's benchmark payoff never exceeds one, and substituting linear projection for conditional expectation, several violations of the conditional lower bounds are discovered. The violations are attributed to unit roots in the data.", "doi": "10.7907/jek4e-m2m07", "publisher": "California Institute of Technology", "publication_date": "1992-06" }, { "id": "authors:g9j6y-67681", "collection": "authors", "collection_id": "g9j6y-67681", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170829-145747905", "type": "publication_workingpaper", "title": "Asset Prices in a Speculative Market", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" } ], "abstract": "The stochastic properties of prices in a speculative market are investigated. Agents in the market start with different priors, but update in a rational (i.e., Bayesian) way from realizations of payoffs on the risky asset. Convergence of the equilibrium price to the rational expectations price is investigated, as well as the asymptotic properties of two standard tests of rational expectations. The results are contrasted with stylized facts from forward markets.", "doi": "10.7907/g9j6y-67681", "publisher": "California Institute of Technology", "publication_date": "1992-06" }, { "id": "authors:31151-11489", "collection": "authors", "collection_id": "31151-11489", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170830-163107142", "type": "publication_workingpaper", "title": "Noisy Signalling in Financial Markets", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hughson", "given_name": "Eric", "clpid": "Hughson-E" } ], "abstract": "Separating signaling equilibria of financial markets with anonymous insiders are investigated. Definitions of separating signaling equilibria are extended to allow for the noise that provides anonymity. The role of noise in equilibrium existence results is clarified. In particular, the result of Glosten and Madhavan, that noise is necessary for dealer markets to remain open, is qualified. The separating signaling equilibrium is written as the solution to a central planner's problem. Besides facilitating computation, this formulation highlights: (i) the critical nature of incentive compatibility constraints. (ii) the welfare aspects . The former causes many equilibrium price-quantity schedules to be non-linear and non-differentiable. An analysis of the latter leads to the conclusion that Pareto-efficient outcomes can be approximated by a repeated version of an insider game.", "doi": "10.7907/31151-11489", "publisher": "California Institute of Technology", "publication_date": "1991-06" }, { "id": "authors:psgxd-nyf58", "collection": "authors", "collection_id": "psgxd-nyf58", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170831-143858811", "type": "publication_workingpaper", "title": "Arbitrage Restrictions Across Financial Markets: Theory, Methodology and Tests", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Hillion", "given_name": "Pierre", "clpid": "Hillion-P" } ], "abstract": "The Cox, Ingersoll and Ross [1985a] general equilibrium model is extended by allowing the representative investor to trade in a batch call option market with execution price uncertainty. Necessary restrictions on the execution price uncertainty for the original equilibrium to remain intact are derived. They take the form of moment conditions in the pricing error (defined as the difference between the observed call price and the theoretical call price that would obtain in the absence of execution price uncertainty). The moment conditions can easily be estimated and tested using a version of the Method of Simulation Moments (MSM). In it, simulation estimates, obtained by discretely approximating the risk-neutral processes of the underlying stock price and the interest rate, are substituted for analytically unknown call prices. The asymptotics and other aspects of the MSM estimator are discussed. The model is tested on transaction prices from the Berkeley Options Data Base.", "doi": "10.7907/psgxd-nyf58", "publisher": "California Institute of Technology", "publication_date": "1991-05" }, { "id": "authors:8y525-hrj13", "collection": "authors", "collection_id": "8y525-hrj13", "cite_using_url": "https://resolver.caltech.edu/CaltechAUTHORS:20170831-132709679", "type": "publication_workingpaper", "title": "Tax-Induced lntertemporal Restrictions on Security Returns", "author": [ { "family_name": "Bossaerts", "given_name": "Peter", "orcid": "0000-0003-2308-2603", "clpid": "Bossaerts-P" }, { "family_name": "Dammon", "given_name": "Robert M.", "clpid": "Dammon-R-M" } ], "abstract": "This paper derives testable restrictions on equilibrium prices when capital gains and losses are taxed only when realized. We use the Generalized Method of Moments (GMM) procedure to estimate and test the restrictions. The empirical results show evidence of capital gains tax effects on the pricing of common stock. The restrictions are not rejected by the data and estimates of the coefficient of risk aversion and the dividend tax rate are precise and economically plausible. Estimates of the capital gains tax rate, however, are often imprecise and economically implausible. Further results indicate that this can be attributed to the fact that our model does not accommodate differential long and short-term tax rates. The data appear to favor the martingale hypothesis for after-tax asset returns over a before-tax consumption-based asset pricing model.", "doi": "10.7907/8y525-hrj13", "publisher": "California Institute of Technology", "publication_date": "1991-05" } ]