What Were the Odds? Estimating the Market's Probability of Uncertain Events

43 Pages Posted: 26 Mar 2021

See all articles by Ashley Langer

Ashley Langer

University of Arizona

Derek Lemoine

University of Arizona - Department of Economics

Date Written: December 2020

Abstract

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.

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Suggested Citation

Langer, Ashley and Lemoine, Derek, What Were the Odds? Estimating the Market's Probability of Uncertain Events (December 2020). NBER Working Paper No. w28265, Available at SSRN: https://ssrn.com/abstract=3812899

Ashley Langer (Contact Author)

University of Arizona ( email )

Derek Lemoine

University of Arizona - Department of Economics ( email )

McClelland Hall
Tucson, AZ 85721-0108
United States

HOME PAGE: http://www.dereklemoine.com/

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