The University of Southampton
University of Southampton Institutional Repository

The temporal evolution of mispricing in prediction markets

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
1544-6123
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, 1-5. (doi:10.1016/j.frl.2018.08.003).

Record type: Article

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
Download (159kB)
Text
1-s2.0-S1544612318303349-main - Accepted Manuscript
Download (398kB)

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
ORCID for Frank McGroarty: ORCID iD orcid.org/0000-0003-2962-0927
ORCID for Enrico Gerding: ORCID iD orcid.org/0000-0001-7200-552X

Catalogue record

Date deposited: 19 Sep 2018 16:30
Last modified: 17 Dec 2019 05:15

Export record

Altmetrics

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of http://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×