The temporal evolution of mispricing in prediction markets
The temporal evolution of mispricing in prediction markets
We analyze mispricing in prediction markets, a powerful forecasting tool that harnesses the wisdom of the crowd. We show that prediction market prices exhibit mispricing, and we quantify its temporal evolution. Our results suggest that level of the FLB, averaged over the entire time period, decreases with market duration, but this changes when considering only the last trading days. In that case, we find FLB to be positively correlated with duration. We argue that this type of temporal dynamics of mispricing we observe is consistent with herding behavior.
Mispricing, Prediction markets, Asset Pricing, Favorite-longshot bias
1-5
Restocchi, Valerio
98f77fd1-d09f-4e24-932d-9c618f4307ab
McGroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Restocchi, Valerio
98f77fd1-d09f-4e24-932d-9c618f4307ab
McGroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Restocchi, Valerio, McGroarty, Frank and Gerding, Enrico
(2018)
The temporal evolution of mispricing in prediction markets.
Finance Research Letters, .
(doi:10.1016/j.frl.2018.08.003).
Abstract
We analyze mispricing in prediction markets, a powerful forecasting tool that harnesses the wisdom of the crowd. We show that prediction market prices exhibit mispricing, and we quantify its temporal evolution. Our results suggest that level of the FLB, averaged over the entire time period, decreases with market duration, but this changes when considering only the last trading days. In that case, we find FLB to be positively correlated with duration. We argue that this type of temporal dynamics of mispricing we observe is consistent with herding behavior.
Text
TempEvol
- Author's Original
Text
1-s2.0-S1544612318303349-main
- Accepted Manuscript
More information
Accepted/In Press date: 8 August 2018
e-pub ahead of print date: 11 August 2018
Keywords:
Mispricing, Prediction markets, Asset Pricing, Favorite-longshot bias
Identifiers
Local EPrints ID: 423232
URI: http://eprints.soton.ac.uk/id/eprint/423232
ISSN: 1544-6123
PURE UUID: 29374444-0066-446e-b4ec-5697d78b7950
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Date deposited: 19 Sep 2018 16:30
Last modified: 16 Mar 2024 07:01
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Contributors
Author:
Valerio Restocchi
Author:
Frank McGroarty
Author:
Enrico Gerding
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