The temporal evolution of mispricing in prediction markets

Valerio Restocchi; Frank McGroarty; Enrico Gerding

doi:10.1016/j.frl.2018.08.003

The temporal evolution of mispricing in prediction markets

Valerio Restocchi, Frank McGroarty, Enrico Gerding

Research output: Contribution to journal › Article › peer-review

Abstract

We analyze mispricing in prediction markets, a powerful forecasting tool that harnesses the wisdom of the crowd. We show that prediction market prices exhibit mispricing, and we quantify its temporal evolution. Our results suggest that level of the FLB, averaged over the entire time period, decreases with market duration, but this changes when considering only the last trading days. In that case, we find FLB to be positively correlated with duration. We argue that this type of temporal dynamics of mispricing we observe is consistent with herding behavior.

Original language	English
Number of pages	5
Journal	Finance Research Letters
Early online date	11 Aug 2018
DOIs	https://doi.org/10.1016/j.frl.2018.08.003
Publication status	E-pub ahead of print - 11 Aug 2018

Keywords

Mispricing
Prediction markets
Asset pricing
Favorite-longshot bias

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10.1016/j.frl.2018.08.003

http://www.sciencedirect.com/science/article/pii/S1544612318303349

Cite this

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title = "The temporal evolution of mispricing in prediction markets",

abstract = "We analyze mispricing in prediction markets, a powerful forecasting tool that harnesses the wisdom of the crowd. We show that prediction market prices exhibit mispricing, and we quantify its temporal evolution. Our results suggest that level of the FLB, averaged over the entire time period, decreases with market duration, but this changes when considering only the last trading days. In that case, we find FLB to be positively correlated with duration. We argue that this type of temporal dynamics of mispricing we observe is consistent with herding behavior.",

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AU - Restocchi, Valerio

AU - McGroarty, Frank

AU - Gerding, Enrico

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N2 - We analyze mispricing in prediction markets, a powerful forecasting tool that harnesses the wisdom of the crowd. We show that prediction market prices exhibit mispricing, and we quantify its temporal evolution. Our results suggest that level of the FLB, averaged over the entire time period, decreases with market duration, but this changes when considering only the last trading days. In that case, we find FLB to be positively correlated with duration. We argue that this type of temporal dynamics of mispricing we observe is consistent with herding behavior.

AB - We analyze mispricing in prediction markets, a powerful forecasting tool that harnesses the wisdom of the crowd. We show that prediction market prices exhibit mispricing, and we quantify its temporal evolution. Our results suggest that level of the FLB, averaged over the entire time period, decreases with market duration, but this changes when considering only the last trading days. In that case, we find FLB to be positively correlated with duration. We argue that this type of temporal dynamics of mispricing we observe is consistent with herding behavior.

KW - Mispricing

KW - Prediction markets

KW - Asset pricing

KW - Favorite-longshot bias

UR - https://eprints.soton.ac.uk/423232/

U2 - 10.1016/j.frl.2018.08.003

DO - 10.1016/j.frl.2018.08.003

M3 - Article

JO - Finance Research Letters

JF - Finance Research Letters

SN - 1544-6123

ER -

The temporal evolution of mispricing in prediction markets

Abstract

Keywords

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