Recession Prediction Markets and Rare Macroeconomic Disaster Risk in Asset Prices

29 Pages Posted: 21 Feb 2020 Last revised: 10 Nov 2020

Date Written: March 25, 2020

Abstract

This paper analyzes recession prediction markets from Intrade and PredictIt where individuals bet on the binary outcome of a recession occurring by a certain date. Using a time series of such historical recession prediction market data to measure macroeconomic risk in a variety of asset classes, we find a 1% increase in ex-ante recession prediction market probability is associated with a -0.29% decline in U.S. equity markets and a -0.77 basis point decrease in the 10-Year U.S. Treasury yield. Recession prediction markets also explain a significant amount of the variation in credit spreads, the U.S. Treasury yield curve, and U.S. dollar foreign exchange rates but cannot explain the value and momentum anomalies in equity markets as well as the U.S. treasury term premium.

Suggested Citation

Hartley, Jonathan, Recession Prediction Markets and Rare Macroeconomic Disaster Risk in Asset Prices (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3524686 or http://dx.doi.org/10.2139/ssrn.3524686

Jonathan Hartley (Contact Author)

Stanford University ( email )

Stanford, CA
United States

HOME PAGE: http://www.jonathanhartley.net

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