Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets

Publikation: Working paperForskning


  • PDF

    Forlagets udgivne version, 373 KB, PDF-dokument

In a binary prediction market in which risk-neutral traders have heterogeneous prior beliefs and are allowed to invest a limited amount of money, the static rational expectations equilibrium price is demonstrated to underreact to information. This effect is consistent with a favorite-longshot bias, and is more pronounced when prior beliefs are more heterogeneous. Relaxing the assumptions of risk neutrality and bounded budget, underreaction to information also holds in a more general asset market with heterogeneous priors, provided traders have decreasing absolute risk aversion. In a dynamic asset market, the underreaction of the first period price is followed by momentum.
UdgiverDepartment of Economics, University of Copenhagen
StatusUdgivet - 2009

Bibliografisk note

JEL classification: D82, D83, D84

Antal downloads er baseret på statistik fra Google Scholar og

Ingen data tilgængelig

ID: 17083830