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Prediction Markets for Economic Forecasting

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Author Info

  • Snowberg, Erik

    ()
    (California Institute of Technology)

  • Wolfers, Justin

    ()
    (University of Michigan)

  • Zitzewitz, Eric

    ()
    (Dartmouth College)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6720.

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Length: 44 pages
Date of creation: Jul 2012
Date of revision:
Publication status: forthcoming in: Handbook of Economic Forecasting, Volume 2
Handle: RePEc:iza:izadps:dp6720

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Keywords: prediction markets; forecasting;

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References

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  1. West, K.D., 1994. "Asymptotic Inference About Predictive Ability," Working papers, Wisconsin Madison - Social Systems 9417, Wisconsin Madison - Social Systems.
  2. 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.
  3. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2011. "How Prediction Markets Can Save Event Studies," CEPR Discussion Papers 8351, C.E.P.R. Discussion Papers.
  4. repec:reg:wpaper:82 is not listed on IDEAS
  5. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," CEPR Discussion Papers 5676, C.E.P.R. Discussion Papers.
  6. Erik Snowberg & Justin Wolfers, 2010. "Explaining the Favorite-Long Shot Bias: Is it Risk-Love or Misperceptions?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 118(4), pages 723-746, 08.
  7. Bakshi, Gurdip & Madan, Dilip, 2000. "Spanning and derivative-security valuation," Journal of Financial Economics, Elsevier, vol. 55(2), pages 205-238, February.
  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. Steven Gjerstad, 2004. "Risk Aversion, Beliefs, and Prediction Market Equilibrium," Microeconomics, EconWPA 0411002, EconWPA.
  10. repec:reg:wpaper:460 is not listed on IDEAS
  11. 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.
  12. G�ran Therborn & K.C. Ho, 2009. "Introduction," City, Taylor & Francis Journals, vol. 13(1), pages 53-62, March.
  13. 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.
  14. 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.
  15. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
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  20. 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.
  21. 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.
  22. 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.
  23. 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.
  24. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, Econometric Society, vol. 56(5), pages 1085-1118, September.
  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. 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.
  27. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments 00222, The Field Experiments Website.
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Cited by:
  1. Gürkaynak, Refet S. & Wright, Jonathan, 2013. "Identification and Inference Using Event Studies," CEPR Discussion Papers 9388, C.E.P.R. Discussion Papers.

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