Necessary and Sufficient Conditions for Prediction Market Accuracy

He, Xue-Zhong and Treich, Nicolas (2011) Necessary and Sufficient Conditions for Prediction Market Accuracy.

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Official URL: http://tse-fr.eu/pub/25825

Abstract

We consider a binary-event prediction market in which traders have
heterogeneous prior beliefs. We derive conditions so that the prediction
market is accurate in the sense that the equilibrium price equals
the mean of traders’ beliefs. We show that the prediction market is
accurate i) for all distributions of beliefs if and only if the utility function
is logarithmic, and ii) for all strictly concave utility functions if
and only if the distribution of beliefs is symmetric about one half. We
also exhibit a necessary and sufficient condition for the equilibrium
price to be always above or below the mean beliefs for all symmetric
beliefs distributions.

Item Type: Monograph (Working Paper)
Language: English
Date: February 2011
Uncontrolled Keywords: Prediction market, heterogeneous beliefs, risk aversion, favorite-longshot bias, and asset prices
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:23
Last Modified: 07 Mar 2018 13:23
OAI ID: oai:tse-fr.eu:25825
URI: http://publications.ut-capitole.fr/id/eprint/16442

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