Equities
RE2 Correlated payoffs
Session timeline
Briefing
Period 122:30
Period 222:30
Debrief
The case
Three stocks trade over two periods. Firms two and three bid for one contract, so one firm's good outcome is the other's bad one.
Objective
Finish with as much wealth as possible, from dividends and trading. Graded on final wealth.
What it shows
- Correlated payoffs: information about one stock is information about another.
- Why firms two and three move in opposite directions.
- A message about one firm that changes the price of two.
Watch out for
- Reading a message about firm two as only about firm two.
- Each role holds one of the two competitors, so each is partly hedged against the other's gain.
- Private messages that arrive in different periods for the two roles.
Who takes part
- Analyst — half the class. Holds ONE and TWO. Receives a private message in the first period that rules one outcome out.
- Investor — the other half. Holds ONE and THREE. 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. Runs well straight after RE1.
Concepts
- Market efficiency
Roles
Analyst
You are the analyst. You hold ONE and TWO.
- Firms two and three bid for the same contract.
- 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 ONE and THREE.
- Firms two and three bid for the same contract.
- In the second period you receive a private message that rules one outcome out.
- Assessed on final wealth.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| ONE | Firm one | Continuous trading | Trade it |
| TWO | Firm two | Continuous trading | Trade it |
| THREE | Firm three | Continuous trading | Trade it |
In the tracks
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