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.
|Number of pages||5|
|Journal||Finance Research Letters|
|Early online date||11 Aug 2018|
|Publication status||E-pub ahead of print - 11 Aug 2018|
- Prediction markets
- Asset pricing
- Favorite-longshot bias