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.

View at publisher

Abstract

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.

Impact and interest:

3 citations in Scopus
Search Google Scholar™
2 citations in Web of Science®

Citation counts are sourced monthly from Scopus and Web of Science® citation databases.

These databases contain citations from different subsets of available publications and different time periods and thus the citation count from each is usually different. Some works are not in either database and no count is displayed. Scopus includes citations from articles published in 1996 onwards, and Web of Science® generally from 1980 onwards.

Citations counts from the Google Scholar™ indexing service can be viewed at the linked Google Scholar™ search.

Full-text downloads:

131 since deposited on 26 Mar 2014
74 in the past twelve months

Full-text downloads displays the total number of times this work’s files (e.g., a PDF) have been downloaded from QUT ePrints as well as the number of downloads in the previous 365 days. The count includes downloads for all files if a work has more than one.

ID Code: 69211
Item Type: Journal Article
Refereed: Yes
DOI: 10.1111/j.1468-0297.2012.02561.x
ISSN: 0013-0133
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

Export: EndNote | Dublin Core | BibTeX

Repository Staff Only: item control page