Dynamic Markets

Course Number 1407

Professor Joshua Coval
Fall; Q1Q2; 3 credits
28 sessions
Weekly discussions and trading sessions

Course Concept

Dynamic Markets represents a new approach to learning finance. The course relies heavily on in-class simulations of a variety of market settings where students compete with their classmates for profits. We then study what decision rules produce the best (and worst) results, and relate these policies to popular theories, models, and best practices.

Underlying this approach is the philosophy that truly important financial concepts must emerge as defining features of profit maximizing decision rules. As a result, there is a major emphasis on deriving core concepts in a variety of market settings to study the robustness and real-world applicability of these ideas.

Dynamic Markets is organized into two parts, each consisting of several modules. The first part focuses on deriving core concepts, while the second part of the course explores how these core concepts jointly underlie the practice of professional investment management. From the very beginning of the semester, the emphasis is on learning concepts through actual decision making. It is here that we derive the Law of One Price, Market Efficiency, Price Formation, Portfolio Theory, and the Capital Asset Pricing Model via in-class simulations of real-world markets. With this as our foundation, we will shift our focus during the second half of the semester to building and running an investment firm. Here, we will examine the process of raising capital from outside investors, the execution of various trading strategies, and the consequences of external evaluation of our decisions and performance.

Educational Objectives of the Course

Dynamic Markets examines how finance professionals create value through the practical application of the theory of finance. The course presents a unified framework for thinking about financial decisions focused on the perspective of managers of financial institutions.

Course Content, Organization, and Approach

Practical understanding of real world capital markets is crucial for students interested in a finance career. This course is most appropriate for students who plan to interact with financial markets (money management, investment banking, security analysis and design, market making, institutional sales and trading, CFO, investor relations, public-sector finance). The course is highly analytical, and therefore useful for students seeking to sharpen their quantitative financial skills.

The course is centered on computer-based simulations of financial markets with a variety of investor types, investment opportunities, and settings. All simulations come from disguised real-world historical examples. All simulations are based on data obtained from historical prices, trading volumes, and limit order books. Students are provided with information derived from actual accounting statements, earnings forecasts, and macroeconomic data. Students learn about the functioning of financial markets by actively participating in all stages of managing an investment firm.