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

Author

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

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.

Suggested Citation

  • Bossaerts, Frederik & Yadav, Nitin & Bossaerts, Peter & Nash, Chad & Todd, Torquil & Rudolf, Torsten & Hutchins, Rowena & Ponsonby, Anne-Louise & Mattingly, Karl, 2024. "Price formation in field prediction markets: The wisdom in the crowd," Journal of Financial Markets, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:finmar:v:68:y:2024:i:c:s1386418123000794
    DOI: 10.1016/j.finmar.2023.100881
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