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A logarithmic market scoring rule agent-based model to evaluate prediction markets

Author

Listed:
  • Athos V. C. Carvalho

    (University of Brasilia)

  • Douglas Silveira

    (University of Alberta
    Territorial and Sectoral Analysis Laboratory (LATES))

  • Regis A. Ely

    (Federal University of Pelotas)

  • Daniel O. Cajueiro

    (University of Brasilia
    National Institute of Science and Technology for Complex Systems (INCT-SC)
    Machine Learning Laboratory in Finance and Organizations (LAMFO))

Abstract

Prediction Markets (PMs) are markets in which agents trade event contingent assets. Enterprises use PMs to forecast revenues and project deadlines. This paper presents an Agent-based model, called Logarithmic Market Scoring Rule-Automated Market Maker (LMSR-ASM), to evaluate Prediction Markets. Our model is capable of testing different types of Automated Market Makers (AMMs), which are mathematical functions or computational mechanisms needed to provide liquidity in Prediction Markets. The model offers insights into how to set parameters in a PM and how profits react to contrasting settings and AMMs. In addition, we simulate different probability processes, distinct AMMs, and agent behaviors. This paper also utilizes the LMSR-ASM to evaluate the impact of choosing initial prices in profits and revenue opportunities regarding AMM computational implementation. We show that we can use the LMSR-ASM to find optimal parameters for maximizing profits in PMs and how different AMMs affect market results under a variety of settings.

Suggested Citation

  • Athos V. C. Carvalho & Douglas Silveira & Regis A. Ely & Daniel O. Cajueiro, 2023. "A logarithmic market scoring rule agent-based model to evaluate prediction markets," Journal of Evolutionary Economics, Springer, vol. 33(4), pages 1303-1343, September.
    • Handle: RePEc:spr:joevec:v:33:y:2023:i:4:d:10.1007_s00191-023-00822-w
    DOI: 10.1007/s00191-023-00822-w
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    More about this item

    Keywords

    Agent-based model; Prediction market;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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