What Were the Odds? Estimating the Market&Apos;S Probability of Uncertain Events
43 Pages Posted: 26 Mar 2021 Last revised: 18 Nov 2021
Date Written: December 2020
An event study generates only a lower bound on the full effect of an event unless researchers know the probability that investors assigned to the event before it occurred. We develop two model-free methods for recovering the market’s priced-in probability of events. These methods require running event studies in financial options to complement the standard event study in stock prices. Validating both approaches, we estimate that the 2016 U.S. election outcome had a 12% chance of occurring. This probability is consistent with contemporary polling, bookmaker, and prediction market estimates. Demonstrating the usefulness of our approaches, we show that many OPEC meetings’ outcomes were well-anticipated. OPEC retained substantial influence on world oil prices even as the U.S. increased oil production.
Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Suggested Citation: Suggested Citation