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Bubble World – Laboratory Analysis. This trading platform is developed for the the purpose of analyzing the reasons for the formation of bubbles and extended bull market that are not supported by the rational market hypothesis and fundamental valuation model widely used in the academic world.

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bubble world laboratory analysis
Bubble World – Laboratory Analysis
  • This trading platform is developed for the the purpose of analyzing the reasons for the formation of bubbles and extended bull market that are not supported by the rational market hypothesis and fundamental valuation model widely used in the academic world.
basic features o f the m odel
Basic Features Of The Model
  • The model is divided into fifteen periods of 5 minutes each and there is a gap of three minutes between two periods.
  • The expected value of the dividend over the fifteen period remains constant. We assume a discrete uniform distribution for the true value of dividend during each period.
  • We assume that after the fifteen periods the stock becomes defunct, an information shared with each participant. That means, the expected value of the stock at the end of the 15 periods in Zero.
decision making powers of the participants
Decision making powers of the participants
  • Each participant will start with a cash amount of $10,000 and no leverage power.
  • The participants can go either long or short on the share.
  • The total P&L of each participant at the end of each period is given by the net capital gain or loss plus the dividend that they receive.
analysis
Analysis
  • The model tries the track the relation between the stock price during the fifteen periods and the cash available with the investors to see the effect of liquidity on the stock price.
  • The experiment is repeated three times to see if the investors learn their lessons.
  • The experiment is repeated with students to see if the rational behavior of the investor helps them in curbing bubbles.
  • The investors are ranked at the end of the experiment to see the effects of the “greater fool theory”.
  • All the investors should have zero position at the end of the experiment to make sure that the bubble is not caused because of a few irrational investors.
technical details
Technical Details
  • We use VBA in excel to develop the trading platform. The trading platform is used simultaneously by 50students and the “buy” or “sell” decision of each participant should be immediately reflected in the “Exchange Trading Platform” which will be monitored by the administrator. The individual trading platform of all the participants have identical facilities with the flexibility to change their cash balance, leverage ratio and the ability to limit their decision making powers like going long or short.