Bubbles and Crash Simulation Report PDF

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F553 – Asset Pricing and Financing of FirmBubble and Crash SimulationBubbles occur when the price of a stock is over-valued which cause the price of the stock to rise for a short period of time after which the price drops causing a crash in the value of the asset. The efficient market theory (EMT) i...

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F553 – Asset Pricing and Financing of Firm Bubble and Crash Simulation

Bubbles occur when the price of a stock is over-valued which cause the price of the stock to rise for a short period of time after which the price drops causing a crash in the value of the asset. The efficient market theory (EMT) in financial economics is a market where the price of an asset represents the unbiased estimate of the asset value. The price of an asset does not always have to represent the true value of the asset, the errors in value must be unbiased and the random. From the simulation, it could be seen that the value of the stock was overpriced at the beginning of the simulation. Prices of the stock started around $30 and the redemption value of the stock was $7. Since the starting value was higher than the redemption value by $21, the asset was undervalued, and there was profit opportunities. My strategy was to sell the stock at the highest price as soon as possible. During that time also, I invested in lower priced stocks and sold them when high. Since I was in Asset Market – Group 1, buying asset at low price and selling at high was not so profitable as the assets were on the verge of bubble and crash. At the end of game1 simulation, I ended up with $514.72. In Asset Market – Group 2, the randomness (error) in the price of the asset was so high. The asset was priced below $10 in the first few round and there were so many price points below $7. This type of market encouraged investors to buy the asset at lower prices, hold to redeem the asset at higher price. Thereby benefiting both dividend prospects and redemption price of $7. Group 2 had more available profit opportunities and exploited that.

With this simulation, I was able to learn that the true value of the asset should be lower than $7 because towards the end of the rounds, the prices of the asset were below $7 and investors had no other option but to hold on to the asset in order to get the $7 redemption value. The mistake I made was not buying the asset when the price was below $7....