|
|
| (24 intermediate revisions by 3 users not shown) |
| Line 1: |
Line 1: |
| This paper describes the implementation of a one- hour classroom trading simulation originally
| | <center>{{efficient}}</center> |
| developed by the author when he was a trader at the Chicago Board of Trade. Pre-requisite
| | <br> |
| student knowledge consists of market efficiency concepts, and the market-making process. The
| | <p align="center">[[Image:Donald_final4.jpg|thumb|Description]] <br> |
| simulation involves putting students into teams of 4 or 5 (7 or 8 teams maximum) which function
| | <br> |
| as OTC dealers/market-makers in a novel asset market. The students have intimate knowledge
| | |
| of certain characteristics of this asset, but not full information. The simulation begins when each | | |
| team posts a bid and ask price for the asset which is displayed for all market participants.
| | "The amount of information one can receive depends on the person's background |
| Trading commences as each team is allowed to make one and only one trade with a competing
| | |
| market maker. Trades as well as bid/ask spreads are posted by the moderator who also interjects
| | knowledge about that particular information… Since different people have different |
| with commentary tailored to the knowledge level of the students (active versus passive trading,
| | |
| market maker risk, long and short concepts, price discovery concepts). After each round of
| | background knowledge about the same information, heterogeneity of opinion occurs |
| trading, the teams are allowed to revise their bid/ask spreads. Inevitably, students find that the
| | |
| effective bid/ask spread in the market narrows purely as a function of trading since no new
| | naturally." -Jing Chen <br> |
| information is provided. Depending on the class and students, variations can be introduced
| | |
| including informed outside traders (“Mr. Arbitrage”), economic releases and comments by the
| | |
| Federal Reserve Chairman (suitably vague, of course). These variations allow the students to see
| | |
| first hand the impact of new information on the market as bid/ask spreads widen, volatility
| | |
| increases “over-reaction” to information invariably occurs. The simulation concludes when the
| | |
| bid/ask spreads have effectively bracketed the “true value” of the asset known only to the
| | |
| instructor. The instructor concludes with a discussion of what it means for the market to
| | |
| “process information” as demonstrated in the simulation while also reinforcing the concepts of
| | <center>{{efficient}}</center> |
| market-making, risk, market behavior and trading.
| |
Home | Overview | Purpose | How To Play | Results | Terms | Sources Used | Authors
Description
"The amount of information one can receive depends on the person's background
knowledge about that particular information… Since different people have different
background knowledge about the same information, heterogeneity of opinion occurs
naturally." -Jing Chen
Home | Overview | Purpose | How To Play | Results | Terms | Sources Used | Authors
