Price formation in field prediction markets: The wisdom in the crowd

Frederik Bossaerts, Nitin Yadav, Peter Bossaerts, Chad Nash, Torquil Todd, Torsten Rudolf, Rowena Hutchins, Anne-Louise Ponsonby and Karl Mattingly

Journal of Financial Markets, 2024, vol. 68, issue C

Abstract: Prediction markets are a successful information aggregation structure, however the exact mechanism by which private information is incorporated into the price remains poorly understood. We introduce a novel method based on the “Kyle model” to identify traders who contribute valuable information to the market price. Applied to a large field prediction market dataset, we identify traders whose trades have positive informational price impact. In contrast to others, these traders realize profit (on average) in excess of a theoretical expected informed lower bound. Results are replicated on other field prediction market datasets, providing strong evidence in favor of the Kyle model.

Keywords: Price formation; Informed traders; Market microstructure (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:68:y:2024:i:c:s1386418123000794

DOI: 10.1016/j.finmar.2023.100881

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