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How Prediction Markets Can Save Event Studies

  • Snowberg, Erik

    ()

    (California Institute of Technology)

  • Wolfers, Justin

    ()

    (University of Michigan)

  • Zitzewitz, Eric

    ()

    (Dartmouth College)

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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5640.

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Length: 27 pages
Date of creation: Apr 2011
Date of revision:
Publication status: Published in: Leighton Vaughn Williams (ed), Prediction Markets, Routledge, 2011.
Handle: RePEc:iza:izadps:dp5640
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  1. 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.
  2. Justin Wolfers & Eric Zitzewitz, 2004. "Prediction Markets," Journal of Economic Perspectives, American Economic Association, vol. 18(2), pages 107-126, Spring.
  3. Justin Wolfers & Eric Zitzewitz, 2006. "Interpreting Prediction Market Prices as Probabilities," NBER Working Papers 12200, National Bureau of Economic Research, Inc.
  4. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  5. 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.
  6. Knight, Brian, 2006. "Are policy platforms capitalized into equity prices? Evidence from the Bush/Gore 2000 Presidential Election," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 751-773, May.
  7. Ray C. Fair, 1996. "Econometrics and Presidential Elections," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 89-102, Summer.
  8. 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.
  9. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2007. "Partisan Impacts on the Economy: Evidence From Prediction Markets and Close Elections," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 807-829, 05.
  10. Jayachandran, Seema, 2006. "The Jeffords Effect," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 397-425, October.
  11. 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.
  12. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2006. "Party Influence in Congress and the Economy," NBER Working Papers 12751, National Bureau of Economic Research, Inc.
  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. Paul W. Rhode & Koleman Strumpf, 2008. "Historical Political Futures Markets: An International Perspective," NBER Working Papers 14377, National Bureau of Economic Research, Inc.
  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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