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Wednesday, July 13, 2005

Markets, Information, and Prices

Q: What do rain, baseball, exchange rates, efficient markets, and interest rates have in common?

A: They're all in this piece by Mike Moffatt (economics doctoral student at the University of Western Ontario) titled How Markets Use Information To Set Prices (note: the example begins about halfway down the page). It gives a very nice explanation of the process by which market prices adjust to new information.

Moffatt provides an extended example of the price-setting process using the recent Tradesports contract for the "American League Wins The All-Star Game". He traces the price changes in the contract as the All-Star game progressed. At the end of the example, he even discusses how the contract for "The Yankees Win The World Series" went up following the American League All-Star win.

Once you're done reading the piece, go to the top of the page and click on the "economics" link. Moffatt has a number of pieces on various economics topics, like "What Is The Demand For Money" and "A Beginner's Guide To Economic Indicators". Browse around - there's lots of good stuff there, and it's all well written with the layman in mind.

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