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Improving prediction market forecasts by detecting and correcting possible over-reaction to price movements

Improving prediction market forecasts by detecting and correcting possible over-reaction to price movements
Improving prediction market forecasts by detecting and correcting possible over-reaction to price movements
We examine the impact of price trends on the accuracy of forecasts from prediction markets. In particular, we study an electronic betting exchange market and construct independent variables from market price (odds) time series from 6,058 individual markets (a dataset consisting of over 8.4 million price points). Using a conditional logit model, we find that a systematic relationship exists between trends in odds and the accuracy of odds-implied event probabilities; the relationship is consistent with participants over-reacting to price movements. In particular, in different time segments of the market, increasing and decreasing odds lead, respectively, to under- and over-estimation of odds-implied probabilities. We develop a methodology to detect and correct the erroneous forecasts associated with these trends in odds in order to considerably improve the quality of forecasts generated in prediction markets.
0377-2217
389-405
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Mcdonald, David C.J.
fbe07af1-0891-4db7-858c-793633d98f3f
Johnson, Johnnie
6d9f1a51-38a8-4011-a792-bfc82040fac4
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Cheah, Eng-Tuck
298800de-521f-4aa8-9c04-2f58eece4c6e
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Mcdonald, David C.J.
fbe07af1-0891-4db7-858c-793633d98f3f
Johnson, Johnnie
6d9f1a51-38a8-4011-a792-bfc82040fac4
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Cheah, Eng-Tuck
298800de-521f-4aa8-9c04-2f58eece4c6e

Sung, Ming-Chien, Mcdonald, David C.J., Johnson, Johnnie, Tai, Chung-Ching and Cheah, Eng-Tuck (2019) Improving prediction market forecasts by detecting and correcting possible over-reaction to price movements. European Journal of Operational Research, 272 (1), 389-405. (doi:10.1016/j.ejor.2018.06.024).

Record type: Article

Abstract

We examine the impact of price trends on the accuracy of forecasts from prediction markets. In particular, we study an electronic betting exchange market and construct independent variables from market price (odds) time series from 6,058 individual markets (a dataset consisting of over 8.4 million price points). Using a conditional logit model, we find that a systematic relationship exists between trends in odds and the accuracy of odds-implied event probabilities; the relationship is consistent with participants over-reacting to price movements. In particular, in different time segments of the market, increasing and decreasing odds lead, respectively, to under- and over-estimation of odds-implied probabilities. We develop a methodology to detect and correct the erroneous forecasts associated with these trends in odds in order to considerably improve the quality of forecasts generated in prediction markets.

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More information

Accepted/In Press date: 11 June 2018
e-pub ahead of print date: 20 June 2018
Published date: 1 January 2019

Identifiers

Local EPrints ID: 421405
URI: https://eprints.soton.ac.uk/id/eprint/421405
ISSN: 0377-2217
PURE UUID: ee28a072-3c86-4d78-a708-214b0708606e
ORCID for Ming-Chien Sung: ORCID iD orcid.org/0000-0002-2278-6185
ORCID for Eng-Tuck Cheah: ORCID iD orcid.org/0000-0003-2953-3815

Catalogue record

Date deposited: 11 Jun 2018 16:30
Last modified: 17 Sep 2019 00:51

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