Memoirs of an Indifferent Trader: Estimating Forecast Distributions from Prediction Markets

49 Pages Posted: 25 May 2008 Last revised: 25 Feb 2015

Joyce E. Berg

University of Iowa - Henry B. Tippie College of Business

John Geweke

University of Technology Sydney - Economics Discipline Group

Thomas Rietz

University of Iowa - Henry B. Tippie College of Business

Date Written: March 1, 2010

Abstract

Prediction markets for future events are increasingly common, and they often trade several contracts for the same event. This paper considers the distribution of a normative risk-neutral trader who, given any portfolio of contracts traded on the event, would choose not to reallocate that portfolio of contracts even if transactions costs were zero. Because common parametric distributions can conflict with observed prediction market prices, the distribution is given a nonparametric representation together with a prior distribution favoring smooth and concentrated distributions. The paper finds posterior modal distributions for popular vote shares of the U.S. Presidential candidates in the 100 days leading up to the elections of 1992, 1996, 2000 and 2004, using bid and ask prices on multiple contracts from the Iowa Electronic Markets. On some days the distributions are multimodal or substantially asymmetric. The derived distributions are more concentrated than the historical distribution of popular vote shares in presidential elections, but do not tend to become more concentrated as time to elections diminishes.

Keywords: Forecasting, Information Systems: Systems Analysis and Design, Probability: Distributions, Bayesian Estimation, Iowa Electronic Markets

JEL Classification: C11, C13, C14, C53, C61, C93, D40, D8, G1, G13, G2

Suggested Citation

Berg, Joyce E. and Geweke, John and Rietz, Thomas, Memoirs of an Indifferent Trader: Estimating Forecast Distributions from Prediction Markets (March 1, 2010). Available at SSRN: https://ssrn.com/abstract=1136883 or http://dx.doi.org/10.2139/ssrn.1136883

Joyce E. Berg (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

John Geweke

University of Technology Sydney - Economics Discipline Group ( email )

645 Harris Street
Sydney, NSW 2007
Australia
0295149797 (Phone)

HOME PAGE: http://www.censoc.uts.edu.au/about/members/jgeweke_papers.html

Thomas A. Rietz

University of Iowa - Henry B. Tippie College of Business ( email )

C108 PBB, Suite S244
Iowa City, IA 52242-1994
United States
319-335-0856 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://tippie.uiowa.edu/people/profile/profile.aspx?id=195021

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