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: Sung, M.; Johnson, J.E.V.
Source: The Journal of Prediction Markets, Volume 1, Number 1, February 2007 , pp. 43-59(17)
This paper compares two approaches to predicting outcomes in a speculative market, the horserace betting market. In particular, the nature of one- and two-step conditional logit procedures involving a process for exploding the choice set are outlined, their strengths and weaknesses are compared and their relative effectiveness is evaluated by predicting winning probabilities for horse races at a UK racetrack. The models incorporate variables which are widely recognised as having predictive power and which should therefore be effectively discounted in market odds. Despite this handicap, both approaches produce probability estimates which can be used to earn positive returns, but the two-step approach yields substantially higher profits.
Authors: Deschamps, Bruno; Gergaud, Olivier
Source: The Journal of Prediction Markets, Volume 1, Number 1, February 2007 , pp. 61-73(13)
We analyze the efficiency of English football betting markets between 2002 and 2006. We find evidence of a positive favourite-longshot bias for both home odds and away odds. Draw odds are instead characterized by a negative longshot bias. We also identify a draw bias in the sense that betting at draw odds yields a higher return than betting at home or away odds. Finally, we investigate betting strategies that exploit the variance of odds between bookmakers.
Author: Christiansen, Jed D.
Source: The Journal of Prediction Markets, Volume 1, Number 1, February 2007 , pp. 17-41(25)
This paper discusses a series of prediction markets created and operated in the summer of 2006 to measure calibration and behaviour of small-scale prediction markets. The research finds that small markets are very well calibrated and determines a potential minimum threshold of participation to ensure well-calibrated results. The results also established the markets as very efficient at predicting small probabilities. Behavioural aspects of markets are also examined. Trader behavioural types are assessed and categorised; while a small group of traders were extremely active, over half of all traders rarely traded. Market manipulation is examined and found to be occasionally effective, though only in very small markets. Finally, incentives to trade are discussed; these markets were effective with no incentives for trading at all.
Author: Hanson, Robin
Source: The Journal of Prediction Markets, Volume 1, Number 1, February 2007 , pp. 3-15(13)
In practice, scoring rules elicit good probability estimates from individuals, while betting markets elicit good consensus estimates from groups. Market scoring rules combine these features, eliciting estimates from individuals or groups, with groups costing no more than individuals. Regarding a bet on one event given another event, only logarithmic versions preserve the probability of the given event. Logarithmic versions also preserve the conditional probabilities of other events, and so preserve conditional independence relations. Given logarithmic rules that elicit relative probabilities of base event pairs, it costs no more to elicit estimates on all combinations of these base events.
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.