Publication

The CAPM in thin experimental financial markets

2002
Journal Articles

Abstract

We report on small-scale experiments of simple, repeated asset markets in two risky securities and one risk-free security. As in large-scale experiments, steady convergence towards the CAPM is discovered, but the process is slower and convergence halts before reaching the actual equilibrium. There is evidence that subjects gradually move up in mean-variance space, in accordance with the CAPM. Yet, adjustment stops, presumably because of subjects' hesitance in the face of market thinness. This hesitance can be optimal because of the multidimensional nature of the desired trades. Because of market thinness, subjects have difficulty implementing bundles of trades in a set of parallel markets based on the MUDA trading mechanism. © 2002 Elsevier Science B.V. All rights reserved.

Official source

https://infoscience.epfl.ch/entities/publication/fdcd424e-61c7-472c-b4be-c557b738ccc7

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2002
Journal Articles

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/fdcd424e-61c7-472c-b4be-c557b738ccc7

About this result

Related concepts (23)

Stock market

A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment is usually made with an investment strategy in mind. The total market capitalization of all publicly traded securities worldwide rose from US$2.

Equity risk

Equity risk is "the financial risk involved in holding equity in a particular investment." Equity risk is a type of market risk that applies to investing in shares. The market price of stocks fluctuates all the time, depending on supply and demand. The risk of losing money due to a reduction in the market price of shares is known as equity risk. The measure of risk used in the equity markets is typically the standard deviation of a security's price over a number of periods.

Risk premium

A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less the risk-free return, as demonstrated by the formula below. Where is the risky expected rate of return and is the risk-free return. The inputs for each of these variables and the ultimate interpretation of the risk premium value differs depending on the application as explained in the following sections.