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Designing Informative Securities

  • Yiling Chen
  • Mike Ruberry
  • Jennifer Wortman Vaughan
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    We create a formal framework for the design of informative securities in prediction markets. These securities allow a market organizer to infer the likelihood of events of interest as well as if he knew all of the traders' private signals. We consider the design of markets that are always informative, markets that are informative for a particular signal structure of the participants, and informative markets constructed from a restricted selection of securities. We find that to achieve informativeness, it can be necessary to allow participants to express information that may not be directly of interest to the market organizer, and that understanding the participants' signal structure is important for designing informative prediction markets.

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    File URL: http://arxiv.org/pdf/1210.4837
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    Paper provided by arXiv.org in its series Papers with number 1210.4837.

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    Date of creation: Oct 2012
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    Handle: RePEc:arx:papers:1210.4837
    Contact details of provider: Web page: http://arxiv.org/

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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.
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    7. McKelvey, Richard D & Page, Talbot, 1986. "Common Knowledge, Consensus, and Aggregate Information," Econometrica, Econometric Society, vol. 54(1), pages 109-27, January.
    8. Martin Spann & Bernd Skiera, 2003. "Internet-Based Virtual Stock Markets for Business Forecasting," Management Science, INFORMS, vol. 49(10), pages 1310-1326, October.
    9. Michael Ostrovsky, 2012. "Information Aggregation in Dynamic Markets With Strategic Traders," Econometrica, Econometric Society, vol. 80(6), pages 2595-2647, November.
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    11. Roy Radner, 1997. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Levine's Working Paper Archive 1594, David K. Levine.
    12. Manski, Charles F., 2006. "Interpreting the predictions of prediction markets," Economics Letters, Elsevier, vol. 91(3), pages 425-429, June.
    13. Nielsen, Lars Tyge, 1984. "Common knowledge, communication, and convergence of beliefs," Mathematical Social Sciences, Elsevier, vol. 8(1), pages 1-14, August.
    14. Garthwaite, Paul H. & Kadane, Joseph B. & O'Hagan, Anthony, 2005. "Statistical Methods for Eliciting Probability Distributions," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 680-701, June.
    15. Robert J Aumann, 1999. "Agreeing to Disagree," Levine's Working Paper Archive 512, David K. Levine.
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