Background Note | HBS Case Collection | October 2007

Price Formation

by Joshua D. Coval and Erik Stafford


Investigates how prices are formed in competitive capital markets. Focuses on a single security called AOE. Students compete with computer traders and each other for market making and informed trading profits. Participants receive a variety of public news in the form of a research report on AOE, as well as subscriptions to news announcements and public quarterly earnings forecasts and releases. Participants also have access to costly private information in the form of one-week-ahead price targets for a per-use fee. The market structure is one with a centralized limit order book, but the ability to place limit orders is limited. The simulation of AOE is based on an actual security that has been disguised in time and industry to prevent students from anticipating the price path. All public news and contextual market information presented to students during the simulation correspond to actual information available to market participants in the real world at the time.

Keywords: Capital Markets; Price; Profit; Corporate Disclosure; Newsletters; Industry Structures; Business Processes; Competitive Strategy;


Coval, Joshua D., and Erik Stafford. "Price Formation." Harvard Business School Background Note 208-040, October 2007.