The temporal evolution of mispricing in prediction markets

Valerio Restocchi, Frank McGroarty and Enrico Gerding

Finance Research Letters, 2019, vol. 29, issue C, 303-307

Abstract: We analyze mispricing in prediction markets, a powerful forecasting tool that harnesses the wisdom of the crowd. We show that prediction market prices exhibit mispricing, and we quantify its temporal evolution. Our results suggest that level of the FLB, averaged over the entire time period, decreases with market duration, but this changes when considering only the last trading days. In that case, we find FLB to be positively correlated with duration. We argue that this type of temporal dynamics of mispricing we observe is consistent with herding behavior.

Keywords: Mispricing; Prediction markets; Asset pricing; Favorite-longshot bias (search for similar items in EconPapers)
JEL-codes: D4 G1 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:29:y:2019:i:c:p:303-307

DOI: 10.1016/j.frl.2018.08.003

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