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How Prediction Markets can Save Event Studies

  • Erik Snowberg

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  • Justin Wolfers

    ()

  • Eric Zitzewitz

    ()

This review paper articulates the relationship between prediction market data and event studies, with a special focus on applications in political economy. Event studies have been used to address a variety of political economy questions—from the economic effects of party control of government to the importance of complex rules in congressional committees. However, the results of event studies are notoriously sensitive to both choices made by researchers and external events. Specifically, event studies will generally produce different results depending on three interrelated things: which event window is chosen, the prior probability assigned to an event at the beginning of the event window, and the presence or absence of other events during the event window. In this paper we show how each of these may bias the results of event studies, and how prediction markets can mitigate these biases.

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File URL: https://cama.crawford.anu.edu.au/pdf/working-papers/2011/072011.pdf
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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 2011-07.

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Length: 26 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:een:camaaa:2011-07
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  1. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," IZA Discussion Papers 2092, Institute for the Study of Labor (IZA).
  2. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2007. "Party Influence in Congress and the Economy," Quarterly Journal of Political Science, now publishers, vol. 2(3), pages 277-286, August.
  3. Paul W. Rhode & Koleman Strumpf, 2008. "Historical Political Futures Markets: An International Perspective," NBER Working Papers 14377, National Bureau of Economic Research, Inc.
  4. Ray C. Fair, 1996. "Econometrics and Presidential Elections," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 89-102, Summer.
  5. 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.
  6. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers 1854, Stanford University, Graduate School of Business.
  7. Paul W. Rhode & Koleman S. Strumpf, 2004. "Historical Presidential Betting Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 127-141, Spring.
  8. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2006. "Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections," IZA Discussion Papers 1996, Institute for the Study of Labor (IZA).
  9. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  10. Seema Jayachandran, 2004. "The Jeffords Effect," UCLA Economics Online Papers 297, UCLA Department of Economics.
  11. Brian Knight, 2004. "Are Policy Platforms Capitalized into Equity Prices? Evidence from the Bush/Gore 2000 Presidential Election," NBER Working Papers 10333, National Bureau of Economic Research, Inc.
  12. 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.
  13. Koleman Strumpf & Paul Rhode, 2006. "Manipulating political stock markets: A field experiment and a century of observational data," Natural Field Experiments 00325, The Field Experiments Website.
  14. Mattozzi, Andrea, 2004. "Can we insure against political uncertainty? Evidence from the U.S. Stock Market," Working Papers 1207, California Institute of Technology, Division of the Humanities and Social Sciences.
  15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  16. Justin Wolfers & Eric Zitzewitz, 2009. "Using Markets to Inform Policy: The Case of the Iraq War," Economica, London School of Economics and Political Science, vol. 76(302), pages 225-250, 04.
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