TY - JOUR
T1 - Price dynamics in political prediction markets
AU - Majumder, Saikat Ray
AU - Diermeier, Daniel
AU - Rietz, Thomas A.
AU - Nunes Amaral, Luís A.
PY - 2009/1/20
Y1 - 2009/1/20
N2 - Prediction markets, in which contract prices are used to forecast future events, are increasingly applied to various domains ranging from political contests to scientific breakthroughs. However, the dynamics of such markets are not well understood. Here, we study the return dynamics of the oldest, most data-rich prediction markets, the Iowa Electronic Presidential Election "winner-takes-all" markets. As with other financial markets, we find uncorrelated returns, power-law decaying volatility correlations, and, usually, power-law decaying distributions of returns. However, unlike other financial markets, we find conditional diverging volatilities as the contract settlement date approaches. We propose a dynamic binary option model that captures all features of the empirical data and can potentially provide a tool with which one may extract true information events from a price time series.
AB - Prediction markets, in which contract prices are used to forecast future events, are increasingly applied to various domains ranging from political contests to scientific breakthroughs. However, the dynamics of such markets are not well understood. Here, we study the return dynamics of the oldest, most data-rich prediction markets, the Iowa Electronic Presidential Election "winner-takes-all" markets. As with other financial markets, we find uncorrelated returns, power-law decaying volatility correlations, and, usually, power-law decaying distributions of returns. However, unlike other financial markets, we find conditional diverging volatilities as the contract settlement date approaches. We propose a dynamic binary option model that captures all features of the empirical data and can potentially provide a tool with which one may extract true information events from a price time series.
KW - Binary model
KW - Econophysics
KW - Information aggregation
KW - Wisdom of the crowd
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U2 - 10.1073/pnas.0805037106
DO - 10.1073/pnas.0805037106
M3 - Article
C2 - 19155442
AN - SCOPUS:58849097271
SN - 0027-8424
VL - 106
SP - 679
EP - 684
JO - Proceedings of the National Academy of Sciences of the United States of America
JF - Proceedings of the National Academy of Sciences of the United States of America
IS - 3
ER -