Information and Financial Markets

Undergraduate / Graduate

This course studies the information economics that underlies modern financial markets and trading. Whether one is into designing new financial marketplaces (for example: fintech, crypto) or creating new trading strategies (for example: high-frequency, active management) or managing complex investment portfolios (for example: hedge funds, pension funds), tools from the economics of information asymmetry play an essential role. We take a deep dive into the technical tools that are commonly used and explore applications that help us place the techniques in context. Topics covered include: Lotteries, Measures of risk aversion, Orders of stochastic dominance, vNM and Savage utilities, Information structures, Blackwell ordering, Bayesian inference, Common knowledge and belief hierarchies, Agreement and No-trade theorems, Grossman-Stiglitz type paradoxes, Role of noise in markets, Kyle and Golsten-Milgrom models of trading and PIN models, along with Dealer, limit-order, automated-market-making and batch-auction market structures.