Author: Putintseva, Maria
Prediction (or information) markets are markets where participants trade contracts whose payoff depends on unknown future events. Studying prediction markets allows to avoid many problems, which arise in some artificially designed behavioral experiments investigating collective decision making or individual’s belief formation. This work is aimed, first, to verify whether predictions made by prices of binary options traded in information markets are reliable and whether the prices contain additional information about the future comparing to the information available from the dynamics of underlying asset only. Second, inter- and intraday microstructure of the market of binary options on Dow Jones Industrial Average index is examined and described quantitatively. Third, since some ability to forecast future changes in the underlying asset is detected, a simple trading strategy based on observing the trading process in the prediction market is suggested and its profitability and applicability is evaluated.
Authors: Tziralis, Georgios; Tatsiopoulos, Ilias
Source: The Journal of Prediction Markets, Volume 1, Number 1, February 2007 , pp. 75-91(17)
This paper presents an attempt to study and monitor the evolution of research on prediction markets (PM). It provides an extended literature review and classification scheme. The former consists of 155 articles, published between 1990 and 2006. The results show that an increasing volume of PM research has been conducted in a very diverse range of areas. The articles are further classified and the results of this classification are presented, based on a scheme that consists of four main categories: description, theoretical work, applications, and law and politics. A comprehensive list of references concludes this literature review. It is the authors’ intention to provide an expedient source for anyone interested in PM research and motivate further interest.
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.
Author: Bergfjord, Ole Jakob
Source: The Journal of Prediction Markets, Volume 5, Number 2, September 2011 , pp. 1-13(13)
Traditionally, the main function of prediction markets (PMs) has been to provide information about probabilities for various events. Good information requires a well-functioning market, which in turn depends on sufficient liquidity and a sufficient number of market participants. While many of the early PMs have been of a more experimental nature, with students or other test groups as market participants, a natural assumption is that future PMs must be able to attract market participants to be successful.
We assume that four main groups of stakeholders face potential gains from a well-functioning PM contract: The exchange launching the contract; hedgers; gamblers; and users of the market information, whether this is a corporation or society as a whole.
In this paper, we analyze different design characteristics of PM contracts, mainly in light of previous studies of futures markets. A relatively extensive literature exists on the design of futures contracts, and a number of criteria have been established to predict whether a contract is likely to be successful. We use this to provide some recommendations for contract design, in order to develop contracts that maximize the gain for the four groups of stakeholders.