Prediction market prices under risk aversion and heterogeneous beliefs

He, X; Treich, N

Prediction market prices under risk aversion and heterogeneous beliefs

He, X

Treich, N

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Publisher:: Elsevier
Publication Type:: Journal Article
Citation:: Journal of Mathematical Economics, 2017, 70 pp. 105 - 114
Issue Date:: 2017-05

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Field	Value	Language
dc.contributor.author	He, X https://orcid.org/0000-0003-1446-9996	en_US
dc.contributor.author	Treich, N	en_US
dc.date.available	2020-05-25T19:07:34Z
dc.date.issued	2017-05	en_US
dc.identifier.citation	Journal of Mathematical Economics, 2017, 70 pp. 105 - 114	en_US
dc.identifier.issn	0304-4068	en_US
dc.identifier.uri	http://hdl.handle.net/10453/123897
dc.description.abstract	In this paper, we examine the properties of prediction market prices when risk averse traders have heterogeneous beliefs in state probabilities. We show that the equilibrium state prices equal the mean beliefs of traders about that state if and only if the traders’ common utility function is logarithmic. We also provide a necessary and sufficient condition ensuring that the state prices are systematically below or above the mean beliefs of traders, thus providing a rational explanation to the favorite-longshot bias in prediction markets.	en_US
dc.publisher	Elsevier	en_US
dc.relation	http://purl.org/au-research/grants/arc/DP130103210
dc.relation.ispartof	Journal of Mathematical Economics	en_US
dc.relation.isbasedon	10.1016/j.jmateco.2017.02.005	en_US
dc.relation.isreplacedby	10453/127289
dc.relation.isreplacedby	http://hdl.handle.net/10453/127289
dc.rights	Elsevier required licence: © 2017 . This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/. The definitive publisher version is available online at https://doi.org/10.1016/j.jmateco.2017.02.005	en_US
dc.subject.classification	Economic Theory	en_US
dc.title	Prediction market prices under risk aversion and heterogeneous beliefs	en_US
dc.type	Journal Article
utslib.citation.volume	70	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	14 Economics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.declined	2018-04-30T12:01:08.318+1000
pubs.consider-herdc	true	en_US
pubs.merge-to	10453/127289
pubs.merge-to	http://hdl.handle.net/10453/127289
pubs.deleted	2018-04-30T12:01:08.318+1000
pubs.publication-status	Published	en_US
pubs.volume	70	en_US

Abstract:

In this paper, we examine the properties of prediction market prices when risk averse traders have heterogeneous beliefs in state probabilities. We show that the equilibrium state prices equal the mean beliefs of traders about that state if and only if the traders’ common utility function is logarithmic. We also provide a necessary and sufficient condition ensuring that the state prices are systematically below or above the mean beliefs of traders, thus providing a rational explanation to the favorite-longshot bias in prediction markets.

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http://hdl.handle.net/10453/123897