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Prediction Markets: A Case Study of Forecasting Cattle on Feed

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  • Karina Gallardo

    (School of Economic Sciences, Washington State University)

Abstract

Prediction markets are becoming a widely used tool to predict outcomes as diverse as presidential election results, movie box office receipts, corporate earnings, and football scores. Prediction markets allow individuals to buy and sell, in an active market, contracts that pay money if an event occurs on or before a specified date. Probably the most well known prediction markets are the Iowa Electronic Markets, which are primarily used to forecast the outcomes of political elections. For example, people trade contracts that pay $1 if Candidate A wins and $0 if Candidate B wins. Participants in the market buy and sell the contracts depending on the expected success of each candidate. If the “going price” of the contract is $0.60, this indicates, under certain assumptions, a 60% chance that Candidate A will win the presidential election.

Suggested Citation

  • Karina Gallardo, 2009. "Prediction Markets: A Case Study of Forecasting Cattle on Feed," Working Papers 2009-15, School of Economic Sciences, Washington State University.
    • Handle: RePEc:wsu:wpaper:gallardo-3
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    File URL: http://www.ses.wsu.edu/PDFFiles/WorkingPapers/Gallardo/WorkingPaper_15_PredictionMarketsCaseStudyForecastingCattleFeed.pdf
    File Function: First version, 2009
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