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Keeping a weather eye on prediction markets: The influence of environmental conditions on forecasting accuracy

Keeping a weather eye on prediction markets: The influence of environmental conditions on forecasting accuracy
Keeping a weather eye on prediction markets: The influence of environmental conditions on forecasting accuracy

Increasingly, prediction markets are being embraced as a mechanism for eliciting and aggregating dispersed information and providing a means of deriving probabilistic forecasts of future uncertain events. The efficient market hypothesis postulates that prediction market prices should incorporate all information that is relevant to the performances of the contracts traded. This paper shows that such may not be the case in relation to information regarding environmental factors such as the weather and atmospheric conditions. In the context of horserace betting markets, we demonstrate that even after the effects of these factors on the contestants (horses and jockeys) have been discounted, the accuracy of the probabilities derived from market prices is affected systematically by the prevailing weather and atmospheric conditions. We show that significantly better forecasts can be derived from prediction markets if we correct for this phenomenon, and that these improvements have substantial economic value.

Forecast calibration, Prediction markets, Probabilistic forecast, Sports forecasting, Weather
0169-2070
321-335
Sperb, Luis Felipe Costa
9e42a3f1-c9be-45b9-8680-eb558b52aab3
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae
Sperb, Luis Felipe Costa
9e42a3f1-c9be-45b9-8680-eb558b52aab3
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae

Sperb, Luis Felipe Costa, Sung, Ming-Chien, Johnson, Johnnie E.V. and Ma, Tiejun (2019) Keeping a weather eye on prediction markets: The influence of environmental conditions on forecasting accuracy. International Journal of Forecasting, 35 (1), 321-335. (doi:10.1016/j.ijforecast.2018.04.005).

Record type: Article

Abstract

Increasingly, prediction markets are being embraced as a mechanism for eliciting and aggregating dispersed information and providing a means of deriving probabilistic forecasts of future uncertain events. The efficient market hypothesis postulates that prediction market prices should incorporate all information that is relevant to the performances of the contracts traded. This paper shows that such may not be the case in relation to information regarding environmental factors such as the weather and atmospheric conditions. In the context of horserace betting markets, we demonstrate that even after the effects of these factors on the contestants (horses and jockeys) have been discounted, the accuracy of the probabilities derived from market prices is affected systematically by the prevailing weather and atmospheric conditions. We show that significantly better forecasts can be derived from prediction markets if we correct for this phenomenon, and that these improvements have substantial economic value.

Text
Prediction markets Revised including tables 160418 - Accepted Manuscript
Restricted to Repository staff only until 22 October 2020.
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More information

Accepted/In Press date: 7 April 2018
e-pub ahead of print date: 23 October 2018
Published date: 1 January 2019
Keywords: Forecast calibration, Prediction markets, Probabilistic forecast, Sports forecasting, Weather

Identifiers

Local EPrints ID: 426445
URI: http://eprints.soton.ac.uk/id/eprint/426445
ISSN: 0169-2070
PURE UUID: a8a02885-2e49-45e5-92fc-e965651a1709
ORCID for Ming-Chien Sung: ORCID iD orcid.org/0000-0002-2278-6185

Catalogue record

Date deposited: 27 Nov 2018 17:30
Last modified: 27 Jan 2020 13:40

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