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Heterogeneous Beliefs and Prediction Market Accuracy

He, Xue-Zhong and Treich, Nicolas (2012) Heterogeneous Beliefs and Prediction Market Accuracy. TSE Working Paper, n. 13-394, Toulouse

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We consider a prediction market in which traders have heterogeneous prior beliefs in probabilities. In the two-state case, we derive necessary and sufficient conditions so that the prediction market is
accurate in the sense that the equilibrium state price equals the mean probabilities of traders' beliefs. We also provide a necessary and sufficient condition for the well documented favorite-longshot bias. In an
extension to many states, we revisit the results of Varian (1985) on the relationship between equilibrium state price and belief heterogeneity.

Item Type: Monograph (Working Paper)
Language: English
Date: 20 August 2012
Place of Publication: Toulouse
Uncontrolled Keywords: Prediction market, heterogeneous beliefs, risk aversion, favorite-longshot bias, complete markets, and asset prices
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 09 Jul 2014 17:35
Last Modified: 07 Mar 2018 13:22
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