1.   Advice on the contents of the exam and technical support

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2.   You are about to sit an online assessment

The standard duration of this exam is 2 HOURS. Additional time of 2 HOURS will be  given to begin and complete this exam.  The additional time allows for downloading the paper, uploading your answers and for any adjustments you might normally       receive if you are registered with the University’s Disability Service (see section3).

3.   Time adjustments for students with disabilities

If you have in the past been granted adjustments to your exam time, e.g. through the University’s Disability Service or at School or College, allowance is made for     these since you have TWICE the normal time usually allowed in which to complete this exam (exam duration +100%).

4.   Enlarging the text

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5.   Planning your time

When planning your time, you should allocate time to download the exam paper and to upload your answers to Moodle at the end of the exam.  For students instructed    to do so, you should allow time to submit your exam script on Turnitin within the

exam period.  Please report any technical difficulties experienced as soon as possible

viahttps://www.gla.ac.uk/help.

6.   Submitting your answers

This exam has been configured to ‘auto-submit’ uploaded file(s) at the end of the scheduled exam time. If you have not submitted your completed answers by this time you should submit via [email protected]               Submissions made direct to School in the two hours following the end of the        scheduled exam time will be treated as ‘late’ and will be graded ‘H’.

7.   Declaration of Academic Integrity

The following information is very important – your degree may be at risk if you do not adhere to these instructions:

●   You must not communicate with any other person about these examination questions during the period in which you can submit your answers

●   You must follow any instructions on your examination paper regarding use of resources such as internet sources, books, notes or any other material that    would not normally be allowed in examinations on campus.

●   The work you submit must be entirely your own effort and must demonstrate your understanding rather than reproduce text from notes, slides, books, or   online sources (which is plagiarism)

●   You must not submit answers you have discussed with or copied from others, and you must not copy from notes you have prepared with or shared with      others.  If your answers are similar to those of any other candidate(s) you will both/all be suspected of collusion and referred to Student Conduct

●   This declaration incorporates the University’s Declaration of Originality which applies to all academic work (see below).

Declaring that the work is your own

Before viewing the exam paper, you must check the box in the Exam Section on the Moodle Course page to agree to both this declaration and the University’s Declaration of Originality.

Comment on the following:

1.1 What is the optimal strategy of the informed trader? [20%]

1.2 What is the optimal pricing scheme of the dealer?    [20%]

1.3  If the dealer executes trader with many traders over time, what happens to the bid and ask prices?                           [10%]

2  [50% total] We analyzed the case in which there is a monopoly dealer in

the G-M model. What if there is a monopoly dealer (market maker) in the static Kyle model?  (You can assume that the mean of the distribution of the value V is zero, so that pó  = u = 0.)

2.1 How will the market maker’s A differ from the competitive mar-          ket maker case? (You should give an intuitive answer and justification —no calculation should be needed.)                                     [15%]

2.2  How will the informed trader’s trading strategy change?      [15%]

2.3 In the competitive market-maker model, the price reflects the               informed trader’s information. If you calculate the projection of V on total order flow y = z +u in the monopoly market maker situation, is the informativeness of the price bigger or smaller than in the compet- itive market maker situation?  [HINT: The projection will allow you to calculate the forecast error variance; is it bigger or smaller than in the competitive case?  Also, don’t try to fully solve out the model;

just use the information from part 2.1 and 2.2]                  [20%]

Section  B

You must Answer one question from this section.You          must answer ALL parts of the chosen question. Submit your answer in a (single) separate document.

3  [50% total] The government is contemplating imposing a transaction tax

on stock market trades, that is, a fixed cost of e1 would be imposed on each trade.  Comment on the effects of this law should it be adopted, in the context of the material covered in this course.

Specifically, comment on

3.1 The impact on the serial correlation patterns of stocks. Will it be possible to make trading profits from this pattern? [10%]

3.2  How is the learning process affected?                         [10%]

3.3 Will the impact on stocks be uniform across stocks? [10%]

3.4 Analyse the tax using the G-M model. In each round of trading,

either an uninformed trader arrives or an informed trader arrives, just as in the standard G-M model.  Also, trading occurs over multiple periods, so the market maker can learn and adjust 6. The trader pays

the tax.                                                                     [20%]

● Discuss the  range of prices  in which the  informed trader will trade, and the range in which he will not trade. It will be helpful to include schematic diagrams.

● The market maker understands the optimal trading decision of the informed trader, and therefore adjusts his pricing rule accord- ingly. Discuss the pricing rule in each case.