Bursting Bubbles: Linking Experimental Financial Market Results to Field Market Data

28 Pages Posted: 24 Nov 2006

See all articles by Julia Henker

Julia Henker

Bond University

Sian A. Owen

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Date Written: August 2006

Abstract

The laboratory, where variables can be measured and controlled, is perhaps the most efficient place to test scientific theory, yet in general, empirical financial research neglects experimental finance results. We link laboratory findings to real world, or field, data, applying the Smith, Suchanek and Williams (1988) experimental market model to Australian stock exchange data. We introduce modifications that improve the model's fit to field market conditions. The experimental model is a reliable predictor of field market bubble bursts in more than 50% of the cases we test, and our modifications improve the performance to 77% of the cases. Our results suggest that experimental financial market results should be accorded more attention in empirical research.

Keywords: Experimental Finance, Asset Price Bubbles, Order Imbalance

JEL Classification: G10, G12, G14

Suggested Citation

Henker, Julia and Owen, Sian A., Bursting Bubbles: Linking Experimental Financial Market Results to Field Market Data (August 2006). Available at SSRN: https://ssrn.com/abstract=947027 or http://dx.doi.org/10.2139/ssrn.947027

Julia Henker (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia

Sian A. Owen

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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