Forskning ved Københavns Universitet - Københavns Universitet

Forside

Aggregation of Information and Beliefs in Prediction Markets

Publikation: Working paperForskning

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
OriginalsprogEngelsk
UdgiverFinance Research Unit. Department of Economics, University of Copenhagen
Antal sider26
StatusUdgivet - 2007

Bibliografisk note

JEL Classification: D82, D83, D84

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