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Prediction Markets for Economic Forecasting

  • Snowberg, Erik

    ()

    (California Institute of Technology)

  • Wolfers, Justin

    ()

    (University of Michigan)

  • Zitzewitz, Eric

    ()

    (Dartmouth College)

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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File URL: http://ftp.iza.org/dp6720.pdf
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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: published in: Handbook of Economic Forecasting, 2013, 2A, 657-684
Handle: RePEc:iza:izadps:dp6720
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  1. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2006. "Partisan impacts on the economy: evidence from prediction markets and close elections," Working Paper Series 2006-08, Federal Reserve Bank of San Francisco.
  2. David Laster & Paul Bennett & In Sun Geoum, 1999. "Rational Bias In Macroeconomic Forecasts," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 293-318, February.
  3. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2011. "How Prediction Markets can Save Event Studies," CESifo Working Paper Series 3434, CESifo Group Munich.
  4. Gürkaynak, Refet S. & Wolfers, Justin, 2006. "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk," CEPR Discussion Papers 5466, C.E.P.R. Discussion Papers.
  5. Snowberg, Erik & Wolfers, Justin, 2010. "Explaining the Favorite-Longshot Bias: Is it Risk-Love or Misperceptions?," CEPR Discussion Papers 7801, C.E.P.R. Discussion Papers.
  6. Plott, Charles R. & Sunder, Shyam., . "Efficiency of Experimental Security Markets with Insider Information: An Application of Rational Expectations Models," Working Papers 331, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. 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.
  8. Bakshi, Gurdip & Madan, Dilip, 2000. "Spanning and derivative-security valuation," Journal of Financial Economics, Elsevier, vol. 55(2), pages 205-238, February.
  9. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  10. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-84, September.
  11. Wolfers, Justin & Zitzewitz, Eric, 2006. "Interpreting Prediction Market Prices as Probabilities," CEPR Discussion Papers 5676, C.E.P.R. Discussion Papers.
  12. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-59, April.
  13. Robin Hanson, 2007. "Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation," Journal of Prediction Markets, University of Buckingham Press, vol. 1(1), pages 3-15, February.
  14. 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.
  15. Tom W. Bell, 2009. "Private Prediction Markets and the Law," Journal of Prediction Markets, University of Buckingham Press, vol. 3(1), pages 89-110, April.
  16. Robin Hanson & Ryan Oprea, 2009. "A Manipulator Can Aid Prediction Market Accuracy," Economica, London School of Economics and Political Science, vol. 76(302), pages 304-314, 04.
  17. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June.
  18. Georgios Tziralis & Ilias Tatsiopoulos, 2007. "Prediction Markets: An Extended Literature Review," Journal of Prediction Markets, University of Buckingham Press, vol. 1(1), pages 75-91, February.
  19. Colin F. Camerer, 1998. "Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 457-482, June.
  20. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments 00222, The Field Experiments Website.
  21. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September.
  22. G�ran Therborn & K.C. Ho, 2009. "Introduction," City, Taylor & Francis Journals, vol. 13(1), pages 53-62, March.
  23. Jim Lavoie, 2009. "The Innovation Engine at Rite-Solutions: Lessons from the CEO," Journal of Prediction Markets, University of Buckingham Press, vol. 3(1), pages 1-11, April.
  24. Steven Gjerstad, 2004. "Risk Aversion, Beliefs, and Prediction Market Equilibrium," Microeconomics 0411002, EconWPA.
  25. 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.
  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, vol. 55(3), pages 348-361, March.
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