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==Overview:== | |||
The experiment involves putting students into teams of 4 or 5 which function as market-makers in a asset market. The students have partial knowledge of certain characteristics of this asset, but not full information. The experiment begins when each team posts a bid and ask price for the asset which is displayed for all market participants. 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 moderators who also vary information based on how the market adjusts. After each round of trading, the teams are allowed to revise their bid/ask spreads. The market makers should find that the effective bid/ask spread in the market narrows and eventually reaches equilibrium based purely as a function of trading since no new information is provided. Depending on the class and students, variations can be introduced including informed outside traders or economic releases. These variations may greatly alter the market at first, as overreaction could occur. The experiment concludes when the bid/ask spreads have effectively bracketed the “true value” of the asset known only to those conducting the experiment. | |||
<center>{{efficient}}</center> | <center>{{efficient}}</center> | ||
Revision as of 01:29, 13 April 2006
Overview:
The experiment involves putting students into teams of 4 or 5 which function as market-makers in a asset market. The students have partial knowledge of certain characteristics of this asset, but not full information. The experiment begins when each team posts a bid and ask price for the asset which is displayed for all market participants. 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 moderators who also vary information based on how the market adjusts. After each round of trading, the teams are allowed to revise their bid/ask spreads. The market makers should find that the effective bid/ask spread in the market narrows and eventually reaches equilibrium based purely as a function of trading since no new information is provided. Depending on the class and students, variations can be introduced including informed outside traders or economic releases. These variations may greatly alter the market at first, as overreaction could occur. The experiment concludes when the bid/ask spreads have effectively bracketed the “true value” of the asset known only to those conducting the experiment.
