1
Problem Set 2: Bubbles and Experimental Asset Markets.
Student’s Name
Number
Course
Instructor
Date
, 2
Problem 1: Asset Markets and Bubbles
a) Fundamental value of stock
In experimental asset markets, the fundamental value (FV) of a stock is used to estimate its
future cash flows using finance theory. This valuation at any time (t) uses the asset's predicted
dividends until period (T) and its terminal buyout value, discounted for time value.
The expected dividend μα is based on a weighted average of potential dividends, reflecting their
probabilistic nature. This averaging is essential to account for future payment risk. To calculate
the present value of expected dividends, the discount factor (1+r)^n is applied to all future
periods, taking into account the opportunity cost of capital (r) in the interest rate.
The asset's terminal buyout value (K) is also discounted to its present value. This component
includes the asset's final cash flow to complete the model.
Thus, the FV formula:
FVt=(1+r)T−t+1μ+(1+r)T−t+1K
The formula integrates these features showing the overall assessment of the intrinsic value,
which defined as the ability of future cash flows generation, balanced by the cost of capital. This
valuation technique is linked to discounted cash flow or DCF method, which is a pillar of
financial analysis and is recognized beyond the experimental markets to almost all asset-pricing
in the real world.
(b): Equity Trend Analysis Utilizing Fundamental Values
Based on the benchmark conditions provided in Smith, Suchanek, and Williams (1988), a zero
interest rate (r=0) and the buyout value (K=0), the fundamental value (FV) of the stock shares is
mainly determined by the anticipated dividends. Because dividends stay unchanged and there
won’t be value growth any further beyond the dividends, the fair value FV is decreasing with the
number of years left. This decrease is because, with each passing round, there are fewer future
dividends to be received, indicating a decreasing trend in FV over time.
FV
Decreasing (FVt)
t 1,2…15
c) Total Endowment Value Calculation
The total endowment value before trading for each class involves summing the present value of
the asset’s future dividends and the initial cash endowment. Given the experimental setup, the
calculation will depend on the initial allocations and the expected value of dividends. The
Problem Set 2: Bubbles and Experimental Asset Markets.
Student’s Name
Number
Course
Instructor
Date
, 2
Problem 1: Asset Markets and Bubbles
a) Fundamental value of stock
In experimental asset markets, the fundamental value (FV) of a stock is used to estimate its
future cash flows using finance theory. This valuation at any time (t) uses the asset's predicted
dividends until period (T) and its terminal buyout value, discounted for time value.
The expected dividend μα is based on a weighted average of potential dividends, reflecting their
probabilistic nature. This averaging is essential to account for future payment risk. To calculate
the present value of expected dividends, the discount factor (1+r)^n is applied to all future
periods, taking into account the opportunity cost of capital (r) in the interest rate.
The asset's terminal buyout value (K) is also discounted to its present value. This component
includes the asset's final cash flow to complete the model.
Thus, the FV formula:
FVt=(1+r)T−t+1μ+(1+r)T−t+1K
The formula integrates these features showing the overall assessment of the intrinsic value,
which defined as the ability of future cash flows generation, balanced by the cost of capital. This
valuation technique is linked to discounted cash flow or DCF method, which is a pillar of
financial analysis and is recognized beyond the experimental markets to almost all asset-pricing
in the real world.
(b): Equity Trend Analysis Utilizing Fundamental Values
Based on the benchmark conditions provided in Smith, Suchanek, and Williams (1988), a zero
interest rate (r=0) and the buyout value (K=0), the fundamental value (FV) of the stock shares is
mainly determined by the anticipated dividends. Because dividends stay unchanged and there
won’t be value growth any further beyond the dividends, the fair value FV is decreasing with the
number of years left. This decrease is because, with each passing round, there are fewer future
dividends to be received, indicating a decreasing trend in FV over time.
FV
Decreasing (FVt)
t 1,2…15
c) Total Endowment Value Calculation
The total endowment value before trading for each class involves summing the present value of
the asset’s future dividends and the initial cash endowment. Given the experimental setup, the
calculation will depend on the initial allocations and the expected value of dividends. The
