Market Bubbles: Collective Behavior in the Financial Market

Speaker: Chon Kit Pun

When: September 18, 2017 (Mon), 01:30PM to 02:30PM (add to my calendar)
Location: SCI 328

This event is part of the Preliminary Oral Exam.

Examining Committee: William Klein, Harvey Gould, Kirill Korolev, Christopher Grant, Alex Sushkov

Abstract:

From the stock bubbles in the 1920s, which eventually led to the Great Depression in the 1930s, to the recent boom and bust of the real estate bubbles in 2007-2009, market bubbles have been the main source of instability in the financial market. While speculators and momentum traders are blamed to have driven the price away from the reasonable level during the formation of a bubble, value investors like the fund managers may sometimes fail to correct the price and instead join 'riding the bubble', which help growing the bubble further.

In this talk I will present an agent-based model of how the collective behavior of traders give rise to a bubble. In this model traders learn which assets to invest by using the Experience Weighted Attraction (EWA) learning algorithm, which has its root in both behavioral psychology and game theory and has seen applications in social science and economics. I will show that when traders tend to invest in the `winning' asset, memory and liquidity play an important role in the formation of bubbles. The discussion of the result will be emphasized on the implication to the real market, and on the comparison with statistical physics.