Price Discovery Among the Punters: Using New Financial Betting Markets to Predict Intraday Volatility

42 Pages Posted: 22 Aug 2006

Date Written: July 2006

Abstract

The migration of financial betting to prediction market exchanges in the last 5 years has facilitated the creation of contracts that do not correspond to a security traded on a traditional exchange. The most popular of these have been binary options on the closing value of Dow Jones Industrial Average (DJIA). Prices of these options imply expectations of volatility over the very short term, and they can be used to construct an index that has significant incremental predictive power, even after controlling for multiple lags of realized volatility and implied volatility from longer-term options. The index also has significant incremental power in predicting volatility over the next day, week, or month and in predicting trending or mean reversal in the level of the DJIA.

Keywords: Prediction Markets, Tradesports

JEL Classification: G12, G13

Suggested Citation

Zitzewitz, Eric W., Price Discovery Among the Punters: Using New Financial Betting Markets to Predict Intraday Volatility (July 2006). Available at SSRN: https://ssrn.com/abstract=925742 or http://dx.doi.org/10.2139/ssrn.925742

Eric W. Zitzewitz (Contact Author)

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~ericz

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
284
Abstract Views
1,257
rank
105,542
PlumX Metrics