A STATISTICAL MODEL OF CLAIM PRICES IN PREDICTION MARKETS

Article Sidebar

Requires Subscription or Fee PDF (GBP 25)
Published: Dec 18, 2012
DOI: https://doi.org/10.5750/jpm.v4i3.481
Keywords:
prediction markets decision markets forecasting predictions inside information.

Main Article Content

Russ Ray
College of Business University of Louisville

Abstract

This paper finds that claim prices in prediction markets, a new genre of financial markets, follow a Poisson distribution. The significance of this finding is that as soon as a claim in a prediction market is created and thereafter flushes out expert and inside information from around the world regarding that particular claim, claim prices immediately begin forming bell-shaped distributions, implying global agreement regarding the probabilities of claims being realized. This is an interesting finding, implying a surprisingly high degree of global homogeneity of inside information in predictions markets, even though such information is scattered in disconnected and secretive pockets around the world. This finding could also imply that cultural diversities do not significantly affect the interpretation of information in prediction markets. 

Article Details

Issue
Vol. 4 No. 3 (2010)
Section
Articles

References

Berg, J., Nelson, F., and Rietz, T. “Prediction Market Accuracy in the Long Run.” 2008; International Journal of Forecasting, Spring/Jun 2008, Vol. 24, No. 2, p. 283+.

Good, J., “Some Statistical Applications of Poisson’s Work.” 1996; Statistical Science. May, 1996. Vol. 1, No. 2, 157-170.

Malkiel, B., “The Efficient Market Hypothesis and Its Critics,” 2003; Journal of Economic Perspectives, 17(1), 59-82.

Moyer, M., “How to Predict the Future.” 2007; Popular Science, 271(1), 69-71.

Pennock, S., Lawrence, C., Giles, L. and Nielsen, F., “The Real Power of Artificial Markets.” 2001; Science, 291(5506), 987-988.

Ray, R. “Planning with Prediction Markets.” Strategy. March, 2009. Issue 19, 28-30.

_____. “Decision Markets: A Powerful Capital-Budgeting Tool.” July/August, 2008. Corporate Finance Review, 13 (1), 5-9.

______. “Prediction Markets and the Financial Wisdom of Crowds.” Journal of Behavioral Finance, 2006; Vol. 7, No., 2-4.

Rosenbloom, E., and Notz, W., “Statistical Tests of Real-Money Versus Play-Money Prediction Markets,” 2006;. Electronic Markets, Vol. No, 1, p. 63+.

Samuelson, P., “The Mathematics of Speculative Prices.” 1972; Reprinted in SIAM Review, 15, 1-42.

Servan-Schreiber, e., Wolfers, J., Pennock, D., and Galebach, B., “Prediction Markets: Does Money Matter?” 2004; Electronic Markets, Vol. 14, No. 3. p. 243+.

Sharpe, W., “Nuclear Financial Economics,” 1995; in Risk Management: Challenges and Solutions by Bever, W., and Parker, G. (McGraw Hill.)

Shiller, R., “ From Efficient Markets Theory to Behavioral Finance.” 2003; Journal of Economic Perspectives, 17(1), 83-104.

Wolfers, J., and Zitzewitz, E., “Prediction Markets.” 2004; Journal of Economic Perspectives, Vol. 18, No. 2 (2), 107-132.