Predictive Power of Information Market Prices

Maria Putintseva

No 11-23, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Prediction (or information) markets are markets where participants trade contracts whose payoff depends on unknown future events. Studying prediction markets allows to avoid many problems, which arise in some artificially designed behavioral experiments investigating collective decision making or individual’s belief formation. This work is aimed, first, to verify whether predictions made by prices of binary options traded in information markets are reliable and whether the prices contain additional information about the future comparing to the information available from the dynamics of underlying asset only. Second, inter- and intraday microstructure of the market of binary options on Dow Jones Industrial Average index is examined and described quantitatively. Third, since some ability to forecast future changes in the underlying asset is detected, a simple trading strategy based on observing the trading process in the prediction market is suggested and its profitability and applicability is evaluated.

Keywords: Prediction Market; Forecasting; Probability; Trading Strategy; Market Microstructure (search for similar items in EconPapers)
JEL-codes: D49 D83 G13 G14 G17 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2011-06
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1123

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