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When are prediction market prices most informative?

Brown, A., Reade, J. J. and Vaughan Williams, L. (2019) When are prediction market prices most informative? International Journal of Forecasting, 35 (1). pp. 420-428. ISSN 0169-2070

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To link to this item DOI: 10.1016/j.ijforecast.2018.05.005

Abstract/Summary

Prediction markets are a popular platform for eliciting incentivised crowd predictions. In this paper, we examine variation in the information contained in prediction market prices by studying Intrade prices on U.S. elections around the release of opinion polls. We find that poll releases stimulate an immediate uptick in trading activity. However, much of this activity involves relatively inexperienced traders and, as a result, price efficiency declines in the immediate aftermath of a poll release. It is not until more experienced traders enter the market in the following hours that price efficiency recovers. More generally, this suggests that information releases do not necessarily improve prediction market forecasts, but may instead attract noise traders who temporarily reduce price efficiency.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:77453
Publisher:Elsevier

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