Short-Selling in Prediction Markets

Authors: Teschner, Florian; Coblenz, Maximilian; Weinhardt, Christof

Source: The Journal of Prediction Markets, Volume 5, Number 2, September 2011 , pp. 14-31(18)

Macroeconomic forecasts are used extensively in industry and government even though the historical accuracy and reliability is questionable. We design a market for economic derivatives that aggregates macro-economic information. The market generated forecasts compare well to the Bloomberg- survey forecasts, the industry standard. It is an ongoing debate in finance whether short selling has positive or negative effects on market efficiency. We discuss how short selling can be implemented in such markets. Using an event-study approach we find that introducing short selling further improves forecast accuracy. By allowing traders to short sell, mispricing is reduced and hence market forecasts are closer to actual macro economic outcome. Furthermore, we find short selling lowers quoted spreads, a measure for market uncertainty.

Link:  www.predictionmarketjournal.com

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