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Prediction Markets for Economic Forecasting

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Author Info

  • 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. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. Robin Hanson, 2007. "Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation," Journal of Prediction Markets, University of Buckingham Press, vol. 1(1), pages 3-15, February.
  3. Refet S. Gürkaynak & Justin Wolfers, 2005. "Macroeconomic derivatives: an initial analysis of market-based macro forecasts, uncertainty, and risk," Working Paper Series 2005-26, Federal Reserve Bank of San Francisco.
  4. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2006. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," Working paper 230, Regulation2point0.
  5. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," CEPR Discussion Papers 5676, C.E.P.R. Discussion Papers.
  6. Steven Gjerstad, 2004. "Risk Aversion, Beliefs, and Prediction Market Equilibrium," Microeconomics 0411002, EconWPA.
  7. Georgios Tziralis & Ilias Tatsiopoulos, 2007. "Prediction Markets: An Extended Literature Review," Journal of Prediction Markets, University of Buckingham Press, vol. 1(1), pages 75-91, February.
  8. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," CESifo Working Paper Series 3029, CESifo Group Munich.
  9. 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.
  10. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-84, September.
  11. G�ran Therborn & K.C. Ho, 2009. "Introduction," City, Taylor & Francis Journals, vol. 13(1), pages 53-62, March.
  12. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2011. "How Prediction Markets Can Save Event Studies," CEPR Discussion Papers 8351, C.E.P.R. Discussion Papers.
  13. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-59, April.
  14. Plott, Charles R & Sunder, Shyam, 1982. "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational-Expectations Models," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 663-98, August.
  15. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  16. Andrew Leigh & Justin Wolfers & Eric Zitzewitz, 2003. "What Do Financial Markets Think of War in Iraq?," NBER Working Papers 9587, National Bureau of Economic Research, Inc.
  17. Arrow, Kenneth J. & Forsythe, Robert & Gorham, Michael & Hahn, Robert W. & Hanson, Robin & Ledyard, John O. & Levmore, Saul & Litan, Robert E. & Milgrom, Paul & Nelson, Forrest D. & Neumann, George R., 2008. "The Promise of Prediction Markets," Working paper 460, Regulation2point0.
  18. Pedro Santa-Clara & Rossen Valkanov, 2003. "The Presidential Puzzle: Political Cycles and the Stock Market," Journal of Finance, American Finance Association, vol. 58(5), pages 1841-1872, October.
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  21. Robin Hanson & Ryan Oprea, 2009. "A Manipulator Can Aid Prediction Market Accuracy," Economica, London School of Economics and Political Science, vol. 76(302), pages 304-314, 04.
  22. Jim Lavoie, 2009. "The Innovation Engine at Rite-Solutions: Lessons from the CEO," Journal of Prediction Markets, University of Buckingham Press, vol. 3(1), pages 1-11, April.
  23. 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, vol. 55(3), pages 348-361, March.
  24. Colin F. Camerer, 1998. "Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting," Journal of Political Economy, 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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