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Prediction Markets for Economic Forecasting

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  • Erik Snowberg

    ()

  • Justin Wolfers

    ()

  • Eric Zitzewitz

    ()

Abstract

Prediction markets—markets used to forecast future events—have been used to accurately forecast the outcome of political contests, sporting events, and, occasionally, economic outcomes. This chapter summarizes the latest research on prediction markets in order to further their utilization by economic forecasters. We show that prediction markets have a number of attractive features: they quickly incorporate new information, are largely efficient, and impervious to manipulation. Moreover, markets generally exhibit lower statistical errors than professional forecasters and polls. Finally, we show how markets can be used to both uncover the economic model behind forecasts, as well as test existing economic models.

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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2012/332012.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2012-33.

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Length: 43 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:een:camaaa:2012-33

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References

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  1. Robin Hanson, 2007. "Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation," Journal of Prediction Markets, University of Buckingham Press, University of Buckingham Press, vol. 1(1), pages 3-15, February.
  2. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(3), pages 503-530, June.
  3. Tom W. Bell, 2009. "Private Prediction Markets and the Law," Journal of Prediction Markets, University of Buckingham Press, University of Buckingham Press, vol. 3(1), pages 89-110, April.
  4. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2006. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," NBER Working Papers 12073, National Bureau of Economic Research, Inc.
  5. G�ran Therborn & K.C. Ho, 2009. "Introduction," City, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(1), pages 53-62, March.
  6. Steven Gjerstad, 2004. "Risk Aversion, Beliefs, and Prediction Market Equilibrium," Microeconomics, EconWPA 0411002, EconWPA.
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  8. Leigh, Andrew & Wolfers, Justin & Zitzewitz, Eric, 2003. "What do Financial Markets Think of War in Iraq?," Research Papers 1785, Stanford University, Graduate School of Business.
  9. Joyce E. Berg & George R. Neumann & Thomas A. Rietz, 2009. "Searching for Google's Value: Using Prediction Markets to Forecast Market Capitalization Prior to an Initial Public Offering," Management Science, INFORMS, INFORMS, vol. 55(3), pages 348-361, March.
  10. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 16(2), pages 254-59, April.
  11. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 134-44, January.
  12. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2011. "How Prediction Markets Can Save Event Studies," NBER Working Papers 16949, National Bureau of Economic Research, Inc.
  13. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  14. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting Prediction Market Prices as Probabilities," NBER Working Papers 12200, National Bureau of Economic Research, Inc.
  15. Snowberg, Erik & Wolfers, Justin, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7801, C.E.P.R. Discussion Papers.
  16. Plott, Charles R. & Sunder, Shyam., . "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational Expectations Models," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 331, California Institute of Technology, Division of the Humanities and Social Sciences.
  17. Jim Lavoie, 2009. "The Innovation Engine at Rite-Solutions: Lessons from the CEO," Journal of Prediction Markets, University of Buckingham Press, University of Buckingham Press, vol. 3(1), pages 1-11, April.
  18. repec:reg:wpaper:460 is not listed on IDEAS
  19. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments 00222, The Field Experiments Website.
  20. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, Econometric Society, vol. 64(5), pages 1067-84, September.
  21. Georgios Tziralis & Ilias Tatsiopoulos, 2007. "Prediction Markets: An Extended Literature Review," Journal of Prediction Markets, University of Buckingham Press, University of Buckingham Press, vol. 1(1), pages 75-91, February.
  22. Bakshi, Gurdip & Madan, Dilip, 2000. "Spanning and derivative-security valuation," Journal of Financial Economics, Elsevier, Elsevier, vol. 55(2), pages 205-238, February.
  23. Pedro Santa-Clara & Rossen Valkanov, 2003. "The Presidential Puzzle: Political Cycles and the Stock Market," Journal of Finance, American Finance Association, American Finance Association, vol. 58(5), pages 1841-1872, October.
  24. Robin Hanson & Ryan Oprea, 2009. "A Manipulator Can Aid Prediction Market Accuracy," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 76(302), pages 304-314, 04.
  25. David Laster & Paul Bennett & In Sun Geoum, 1999. "Rational Bias In Macroeconomic Forecasts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 293-318, February.
  26. Hanson, Robin & Oprea, Ryan & Porter, David, 2006. "Information aggregation and manipulation in an experimental market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 449-459, August.
  27. Colin F. Camerer, 1998. "Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(3), pages 457-482, June.
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Cited by:
  1. Refet S. Gürkaynak & Jonathan H. Wright, 2013. "Identification and Inference Using Event Studies," Manchester School, University of Manchester, vol. 81, pages 48-65, 09.

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