Memoirs of an indifferent trader: Estimating forecast distributions from prediction markets

Berg, JE; Geweke, J; Rietz, TA

Memoirs of an indifferent trader: Estimating forecast distributions from prediction markets

Berg, JE Geweke, J Rietz, TA

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Citation:: 2010
Issue Date:: 2010-07-01

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Field	Value	Language
dc.contributor.author	Berg, JE	en_US
dc.contributor.author	Geweke, J	en_US
dc.contributor.author	Rietz, TA	en_US
dc.date.issued	2010-07-01	en_US
dc.identifier.citation	2010	en_US
dc.identifier.uri	http://hdl.handle.net/10453/33808
dc.identifier.uri	http://hdl.handle.net/10453/32093
dc.identifier.uri	http://hdl.handle.net/10453/33807
dc.description.abstract	Prediction markets for future events are increasingly common and they often trade several contracts for the same event. This paper considers the distribution of a normative risk-neutral trader who, given any portfolio of contracts traded on the event, would choose not to reallocate that portfolio of contracts even if transactions costs were zero. Because common parametric distributions can conflict with observed prediction market prices, the distribution is given a nonparametric representation together with a prior distribution favoring smooth and concentrated distributions. Posterior modal distributions are found for popular vote shares of the U.S. presidential candidates in the 100 days leading up to the elections of 1992, 1996, 2000, and 2004, using bid and ask prices on multiple contracts from the Iowa Electronic Markets. On some days, the distributions are multimodal or substantially asymmetric. The derived distributions are more concentrated than the historical distribution of popular vote shares in presidential elections, but do not tend to become more concentrated as time to elections diminishes. © 2010 Joyce E. Berg, John Geweke, and Thomas A. Rietz.	en_US
dc.title	Memoirs of an indifferent trader: Estimating forecast distributions from prediction markets	en_US
utslib.for	150202 Financial Econometrics	en_US
utslib.for	1403 Econometrics	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/Economics Discipline
utslib.copyright.status	closed_access

Abstract:

Prediction markets for future events are increasingly common and they often trade several contracts for the same event. This paper considers the distribution of a normative risk-neutral trader who, given any portfolio of contracts traded on the event, would choose not to reallocate that portfolio of contracts even if transactions costs were zero. Because common parametric distributions can conflict with observed prediction market prices, the distribution is given a nonparametric representation together with a prior distribution favoring smooth and concentrated distributions. Posterior modal distributions are found for popular vote shares of the U.S. presidential candidates in the 100 days leading up to the elections of 1992, 1996, 2000, and 2004, using bid and ask prices on multiple contracts from the Iowa Electronic Markets. On some days, the distributions are multimodal or substantially asymmetric. The derived distributions are more concentrated than the historical distribution of popular vote shares in presidential elections, but do not tend to become more concentrated as time to elections diminishes. © 2010 Joyce E. Berg, John Geweke, and Thomas A. Rietz.

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http://hdl.handle.net/10453/32093