Research on irrational bubbles in the stock market based on the perspective of generalized virtual economy

Abstract

Purpose

This paper attempts to provide novel approaches and tools for the analysis and measurement of stock bubbles.

Design/methodology/approach

The study is based on the perspective of a generalized virtual economy and the circulation process of accumulation strengthening and exclusion in the stock noise and is based on the symmetric chain model of the evolutionary game of combination of stock markets. Based on the stable ratio of the rational and irrational investors and the asymptotically stable strategy of the model in the two cases, the paper uses the improved classic model of noise trading (DSSW) to calculate the irrational bubbles on the Shanghai stock market.

Findings

The paper shows that the more irrational investors are, the higher the irrational bubbles are.

Practical implications

The method exposed in the paper can be used to study the formation mechanism of the stock market bubble, to analyze the impact of investors' behaviours, to measure the size of irrational bubbles and to put forward some reasonable policy recommendations and preventive measures.

Originality/value

The paper succeeds in pointing out a new stock market's irrational bubble calculation model on the basis of evolutionary game chain structure, and thus measures the size of the Shanghai stock market bubble and makes some tentative research and discussion about the evolution law of the stock market's irrational bubble.

Citation

Liu, H., Jia, T., Yuan, C. and Zhang, Y. (2012), "Research on irrational bubbles in the stock market based on the perspective of generalized virtual economy", Kybernetes, Vol. 41 No. 7/8, pp. 897-907. https://doi.org/10.1108/03684921211257748