Aggregation of Information and Beliefs in Prediction Markets
Publikation: Working paper › Forskning
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Aggregation of Information and Beliefs in Prediction Markets. / Ottaviani, Marco; Sørensen, Peter Norman.
Finance Research Unit. Department of Economics, University of Copenhagen, 2007.Publikation: Working paper › Forskning
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TY - UNPB
T1 - Aggregation of Information and Beliefs in Prediction Markets
AU - Ottaviani, Marco
AU - Sørensen, Peter Norman
N1 - JEL Classification: D82, D83, D84
PY - 2007
Y1 - 2007
N2 - We analyze a binary prediction market in which traders have heterogeneous prior beliefs and private information. Realistically, we assume that traders are allowed to invest a limited amount of money (or have decreasing absolute risk aversion). We show that the rational expectations equilibrium price underreacts to information. When favorable information to an event is available and is revealed by the market, the price increases and this forces optimists to reduce the number of assets they can (or want to) buy. For the market to equilibrate, the price must increase less than a posterior belief of an outside observer
AB - We analyze a binary prediction market in which traders have heterogeneous prior beliefs and private information. Realistically, we assume that traders are allowed to invest a limited amount of money (or have decreasing absolute risk aversion). We show that the rational expectations equilibrium price underreacts to information. When favorable information to an event is available and is revealed by the market, the price increases and this forces optimists to reduce the number of assets they can (or want to) buy. For the market to equilibrate, the price must increase less than a posterior belief of an outside observer
M3 - Working paper
BT - Aggregation of Information and Beliefs in Prediction Markets
PB - Finance Research Unit. Department of Economics, University of Copenhagen
ER -
ID: 672563