Predictive Power of Information Market Prices

Swiss Finance Institute Research Paper No. 11-23

The Journal of Prediction Markets, Forthcoming

31 Pages Posted: 6 Jul 2011 Last revised: 15 Aug 2011

See all articles by Maria Putintseva

Maria Putintseva

University of Zurich - Swiss Banking Institute (ISB); Ecole Polytechnique Fédérale de Lausanne

Date Written: June 23, 2011

Abstract

Prediction (or information) markets are markets where participants trade contracts whose payoff depends on unknown future events. Studying prediction markets allows to avoid many problems, which arise in some artificially designed behavioral experiments investigating collective decision making or individual’s belief formation. This work is aimed, first, to verify whether predictions made by prices of binary options traded in information markets are reliable and whether the prices contain additional information about the future comparing to the information available from the dynamics of underlying asset only. Second, inter- and intraday microstructure of the market of binary options on Dow Jones Industrial Average index is examined and described quantitatively. Third, since some ability to forecast future changes in the underlying asset is detected, a simple trading strategy based on observing the trading process in the prediction market is suggested and its profitability and applicability is evaluated.

Keywords: Prediction Market, Forecasting, Probability, Trading Strategy, Market Microstructure

JEL Classification: D49, D83, G13, G14, G17

Suggested Citation

Putintseva, Maria, Predictive Power of Information Market Prices (June 23, 2011). Swiss Finance Institute Research Paper No. 11-23, The Journal of Prediction Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1878445

Maria Putintseva (Contact Author)

University of Zurich - Swiss Banking Institute (ISB) ( email )

Plattenstrasse 14
CH-8032 Zurich, Zurich 8032
Switzerland

Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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