A STATISTICAL MODEL OF CLAIM PRICES IN PREDICTION MARKETS

Russ Ray

Journal of Prediction Markets, 2010, vol. 4, issue 3, 85-93

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.

Keywords: prediction markets; decision markets; forecasting; predictions; inside information. (search for similar items in EconPapers)
JEL-codes: L83 (search for similar items in EconPapers)
Date: 2010
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