If economics was a science than economics would indeed be considered a dynamic model and a structural model is a mathematical model used to describe a system of interaction among economic agents. If the system is complicated then it will take a trained individual, with a PhD in economics, who knows all the various equations and worked out all the complicated algebra and graphing to describe the model. I have however managed to avoid the terminology stage and have managed to simplify the model without any formal training. Now, if I were to take my university examination for finance I am confident I could pass with flying colors. So, in light of my increasing concerns about the structure and dynamics of financial markets, what advice should I take now? Let me put it this way; don’t try to take university exams for finance until you have mastered a simple structural model in the style of graph theory.
If you wish to pass your tests for regulated markets then I would recommend you study core concepts from the point of view of the dynamic model. These include pricing, asset pricing and portfolio pricing as well as fundamental analysis of financial markets. It is my belief that, even though the concept of the dynamic model may still seem a bit hazy to you, after you have learned all the relevant material in the core areas, you will feel very confident about tackling the pricing component of the exam. This is because, you will need to be able to apply your understanding in real-world situations. So, it is better to get a solid grounding on the models underlying financial markets rather than spend the time studying the theories which are really not relevant for your needs.
To this end, I would recommend that you first work on learning about the pricing of financial instruments. You can choose to focus on either bond or equity pricing and the emphasis should be on understanding the dynamics of these models, as well as learning how they affect the price/value of each financial instrument. However, if you do not like the topic of bond pricing then go ahead and learn about Treasury bonds, MBS, Gilt, stocks and options as this too will give you an opportunity to understand the dynamics of financial markets. In fact, the two topics together can provide great content for the examinations for both modules.
From here, you will need to understand the factors that affect the movements of stock prices, currency exchange rates, bonds, commodities etc. and gain a basic understanding of the operations of the financial markets. It is important to remember that there are a number of models that are used in these situations and they all have various assumptions. It therefore is important to go through as much material as you can on the models and their assumption and use this to determine which assumption needs to be made to reach a conclusion, in respect of the model.
Once you know the various assumptions, you can start looking at some of the key performance indicators, as these are used to interpret the results obtained from the models. These include the Stochastic, Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI) and the exponential moving average. It is very important to understand that these performance indicators do not have a one-size-fits-all effect on the market. You need to understand the concept behind each indicator and how they impact the market and then decide what adjustments need to be made on your models. The only parameter that can be easily altered is the time period over which the analysis is performed
One of the most important concepts that you will need to grasp is the concept of price action. It is impossible to predict the behaviour of the markets without having at least a rudimentary knowledge of the pricing process and the patterns that go with it. This is something that you need to take my exam for you to master. You will need to know the basics of technical analysis, the terminology that are used within the markets, and how the market behaves when the economic structure is in some form of consolidation or contraction. The economic theory that goes behind this process needs to be mastered as well.
Once you have a working knowledge of the market structure, you can begin to develop models that will allow you to forecast the behaviour of the market and therefore make decisions about what to do. You need to be able to project the future based on current information about what is happening in the market. To take my exam for me, you need to be prepared to not only look at the past but also at the present and determine where the information currently available fits in. The market is a very volatile and complex place and there are a lot of forces that it deals with on a daily basis. Forecasting is something that becomes easier with experience. The more information you have at your disposal, the better your forecasting ability will become.