What Were the Odds? Estimating the Market's Probability of Uncertain Events

Ashley Langer and Derek Lemoine

No 28265, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: An event study generates only a lower bound on the full effect of an event unless researchers know the probability that investors assigned to the event before it occurred. We develop two model-free methods for recovering the market’s priced-in probability of events. These methods require running event studies in financial options to complement the standard event study in stock prices. Validating both approaches, we estimate that the 2016 U.S. election outcome had a 12% chance of occurring. This probability is consistent with contemporary polling, bookmaker, and prediction market estimates. Demonstrating the usefulness of our approaches, we show that many OPEC meetings’ outcomes were well-anticipated. OPEC retained substantial influence on world oil prices even as the U.S. increased oil production.

JEL-codes: C58 G13 L71 Q43 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (6)

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