Aggregation of Information and Beliefs in Prediction Markets
Publikation: Working paper › Forskning
Dokumenter
- FRU200701
Forlagets udgivne version, 292 KB, PDF-dokument
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
Originalsprog | Engelsk |
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Udgiver | Finance Research Unit. Department of Economics, University of Copenhagen |
Antal sider | 26 |
Status | Udgivet - 2007 |
Bibliografisk note
JEL Classification: D82, D83, D84
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ID: 672563