Do prediction markets produce well-calibrated probability forecasts?
Page, Lionel & Clemen, Robert T. (2013) Do prediction markets produce well-calibrated probability forecasts? The Economic Journal, 123(568), pp. 491-513.
This article presents new theoretical and empirical evidence on the forecasting ability of prediction markets. We develop a model that predicts that the time until expiration of a prediction market should negatively affect the accuracy of prices as a forecasting tool in the direction of a ‘favourite/longshot bias’. That is, high-likelihood events are underpriced, and low-likelihood events are over-priced. We confirm this result using a large data set of prediction market transaction prices. Prediction markets are reasonably well calibrated when time to expiration is relatively short, but prices are significantly biased for events farther in the future. When time value of money is considered, the miscalibration can be exploited to earn excess returns only when the trader has a relatively low discount rate.
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|Item Type:||Journal Article|
|Subjects:||Australian and New Zealand Standard Research Classification > ECONOMICS (140000)|
|Divisions:||Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
|Copyright Owner:||Copyright 2012 The Author(s). The Economic Journal © 2012 Royal Economic Society|
|Deposited On:||26 Mar 2014 05:11|
|Last Modified:||14 Jun 2014 02:49|
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