Predictive Power of Information Market Prices
AbstractPrediction (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.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 11-23.
Length: 31 pages
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Prediction Market; Forecasting; Probability; Trading Strategy; Market Microstructure;
Find related papers by JEL classification:
- D49 - Microeconomics - - Market Structure and Pricing - - - Other
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
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