Price Discovery, step 5 of 5
RE1 Market efficiency and dividend information
Session timeline
Briefing
Period 122:30
Period 222:30
Debrief
The case
Two stocks trade over two periods. A dividend follows each period, set by a drawn event.
Objective
Finish with as much wealth as possible, from dividends and trading. Graded on final wealth.
What it shows
- Market efficiency: how quickly private information reaches the price.
- Dividend news as the thing the price is about.
- A message that is true and incomplete, because it rules out and does not confirm.
Watch out for
- Reading an exclusion as a confirmation.
- Short sellers pay the dividend, so a short is not free.
- Information that arrives in the first period for one role and the second for the other.
Who takes part
- Analyst — half the class. Holds ABC. Receives a private message in the first period that rules one outcome out.
- Investor — the other half. Holds CRA. Receives a private message in the second period that rules one outcome out.
Class size
Twelve to forty students, split evenly between the two roles. Information only moves the price if someone trades on it, so use a class large enough for both roles to be active.
Concepts
- Market efficiency
- News and prices
Roles
Analyst
You are the analyst. You hold ABC and trade ABC and CRA.
- A dividend is paid after each period. Short sellers pay it.
- In the first period you receive a private message that rules one outcome out.
- Assessed on final wealth.
Investor
You are the investor. You hold CRA and trade ABC and CRA.
- A dividend is paid after each period. Short sellers pay it.
- In the second period you receive a private message that rules one outcome out.
- Assessed on final wealth.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| ABC | ABC | Continuous trading | Trade it |
| CRA | CRA | Continuous trading | Trade it |
In the tracks
- Step 5 of 5 in Price DiscoveryDividend news after each period, and some traders hear first.