DEBRAH MELOSO

Experiments on Asset Pricing under Delegated Portfolio Management
Elena Asparouhova (U of Utah), Peter Bossaerts (Caltech and EPFL), Jernej Copic (UCLA), Bradford Cornell (CRA and Caltech), Jaksa Cvitanic (Caltech), and Debrah Meloso (Bocconi)

Submitted
Abstract: We study the impact of delegated portfolio management on asset pricing in a large-scale experimental setting. As predicted by standard models, in early rounds of our experiment delegation has no impact on pricing; we replicate CAPM pricing as in earlier experiments without delegation. However, CAPM pricing fails in later rounds. We attribute this to the fund flows: investors tend to increase allocations to the managers who performed well in the past. In addition, the fund flows implicitly reflect a reward for variance. As a result, funds become concentrated with a few managers, and the aggregation of individual deviations from mean-variance optimal demands, needed to ensure CAPM pricing, no longer obtains.

delegation paper (2.240 Kb)

Dynamically Complete Experimental Asset Markets
Peter Bossaerts (Caltech and EPFL), Debrah Meloso (Bocconi) and William Zame (UCLA)

Abstract: We compare prices and portfolio choices in complete and incomplete experimental financial markets. The incomplete-markets treatment differs from the complete-markets one in that we shut down one market, and that we announce, halfway through trading, which of three states will not occur. The information structure in the incomplete markets is such that these markets satisfy the necessary condition to be dynamically complete. If they are indeed dynamically complete - a property that depends on the preferences of experiment participants, the individual holdings and asset prices in the incomplete-market treatment must be equivalent to those in the complete-market treatment. This is our finding. The distribution of asset holdings is undistinguishable among treatments, and state-price probability rankings coincide and are equilibrium rankings, except for one case, where incomplete markets achieve close-to-equilibrium ranking more often than complete markets.

dy-complete paper (510 Kb)

Portfolio Correlation and the Power of Portfolio Efficiency Tests
Peter Bossaerts (Caltech and EPFL) and Debrah Meloso (Bocconi)

Abstract: We propose a parametric family of tests of the mean-variance efficiency of a portfolio in a market with a risk-free asset. All tests in the family compare the mean-variance ratio of the tested portfolio (the benchmark portfolio) with the same ratio for a different portfolio, called the reference portfolio. The Gibbons-Ross-Shanken test belongs to this family, and the reference in this case is the ex-post tangency portfolio of the market. We show that the power of a test in our proposed family depends on the correlation between the benchmark and the reference portfolio. This correlation, and thus, the power of the test, can be manipulated by changing the value of the parameter that spans the family. In particular, for a given sample, a power maximizing test can be easily found in the family we propose. This power-maximizing test will generically not be the Gibbons-Ross-Shanken test.

mean-variance paper (318 Kb)