Working Papers by Peter Bossaerts
# | Title | Authors | Date | Length | Paper | Abstract | |
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1450 | Price Formation in Multiple, Simultaneous Continuous Double Auctions, with Implications for Asset Pricing | Ledyard, John O. Asparouhova, Elena Bossaerts, Peter | 07/27/2020 | 65 | sswp_1450.pdf | 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. | |
1095 | Inducing Liquidity In Thin Financial Markets Through Combined-Value Trading Mechanisms. | Ledyard, John O. Bossaerts, Peter Fine, Leslie R.T. | 08/01/2000 | 31 pages | 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. | ||
1084 | The Pricing of Securities Risk in a Universal Banking System: Historical Evidence from Germany | Fohlin, Caroline M. Bossaerts, Peter | 07/01/2000 | 29 pages | wp1084.pdf | 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. | |
1070 | Basic Principles of Asset Pricing Theory: Evidence From Large-Scale Experimental Financial Markets | Bossaerts, Peter Plott, Charles R. | 01/01/2000 | 48 pages | wp1070.pdf | We report on six large-scale nancial markets experiments that were designed to test two of the most basic propositions of modern asset pricing theory, namely, that the interaction between risk averse agents in a competitive market leads to equilibration, and that, in equilibrium, risk premia are solely determined by covariance with aggregate risk. We designed the experiments within the framework suggested by two theoretical models, namely, Arrow and Debreu's complete-markets model, and the Sharpe-Lintner-Mossin Capital Asset Pricing Model (CAPM). This framework enabled us to measure how far our markets were from equilibrium at any point in time, thereby allowing us to gauge the success of the models. The distance measures do not require knowledge of the (uncontrollable) level and dispersion of risk aversion among subjects, and adjust for the impact of progressive trading on the eventual equilibrium. Unlike in our earlier, thin-markets experiments, we discovered swift convergence towards equilibrium prices of Arrow and Debreu's model or the CAPM. This discovery is significant, because subjects always lacked the information to deliberately set asset prices using either model. Sometimes, however, the equilibrium was not found to be robust, with markets readily veering away, apparently as a result of deviations of subjective beliefs from objective probabilities. Still, we find evidence that this did not destroy the tendency for markets to equilibrate as predicted by the theory. In each experiment, we formally test and reject the hypothesis that prices are a random walk, in favor of stochastic convergence towards CAPM and Arrow Debreu equilibrium. | |
1032 | Price Discovery in Financial Markets: The Case of the CAPM | Bossaerts, Peter Kleiman, Daniel Plott, Charles R. | 03/01/1998 | wp1032.pdf | |||
1015 | The Dynamics of Equity Prices in Fallible Markets | Bossaerts, Peter | 08/01/1997 | 42 pages | wp1015.pdf | In an efficient securities market, prices correctly re ect 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. | |
1014 | IPO Post-Issue Markets: Questionable Predilections But Diligent Learners? | Bossaerts, Peter Hillion, Pierre | 08/01/1997 | 48 pages | wp1014.pdf | 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. | |
989 | Expectations and Learning in Iowa | Bossaerts, Peter Bodarenko, Oleg | 04/01/1997 | ||||
977 | Arbitrage-Based Pricing When Volatility is Stochastic | Bossaerts, Peter Ghysels, Eric Gourieroux, Christian | 07/01/1996 | ||||
958 | Martingale Restrictions on Equilibrium Prices of Arrow-Debreu Securities Under Rational Expectations and Consistent Beliefs | Bossaerts, Peter | 05/01/1996 | ||||
952 | Rational Price Discovery in Experimental and Field Data | Bossaerts, Peter | 07/01/1995 | ||||
854 | Testing The Mean-Variance Efficiency of Well-Diversified Portfolios in Very Large Cross-Sections | Bossaerts, Peter Hillion, Pierre | 08/01/1993 | ||||
835 | Transaction Prices When Insiders Trade Portfolios | Bossaerts, Peter | 02/01/1993 | sswp835.pdf | |||
832 | Asset Prices and Volume in a Beauty Contest | Biais, Bruno Bossaerts, Peter | 01/01/1993 | sswp832.pdf | |||
797 | Lower Bounds on Asset Return Comovement. | Bossaerts, Peter | 06/01/1992 | sswp797.pdf | |||
796 | Asset Prices in a Speculative Market. | Bossaerts, Peter | 06/01/1992 | sswp796.pdf | |||
764 | Noisy Signalling in Financial Markets. | Bossaerts, Peter Hughson, Eric | 06/01/1991 | sswp764.pdf | |||
763 | Tax-Induced Intertemporal Restrictions on Security Returns. | Bossaerts, Peter Dammon, Robert M. | 05/01/1991 | sswp763.pdf | |||
751 | Arbitrage Restrictions Across Financial Markets: Theory, Methodology and Tests. | Bossaerts, Peter Hillion, Pierre | 05/01/1991 | sswp751.pdf |