Prediction market prices under risk aversion and heterogeneous beliefs

He, Xue-Zhong and Treich, Nicolas (2017) Prediction market prices under risk aversion and heterogeneous beliefs. Journal of Mathematical Economics, 70. pp. 105-114.

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Official URL: http://tse-fr.eu/pub/31579

Abstract

In this paper, we examine the properties of prediction market prices when risk averse traders have heterogeneous beliefs in state probabilities. We show that the equilibrium state prices equal the mean beliefs of traders about that state if and only if the traders’ common utility function is logarithmic. We also provide a necessary and sufficient condition ensuring that the state prices are systematically below or above the mean beliefs of traders, thus providing a rational explanation to the favorite-longshot bias in prediction markets.

Item Type: Article
Language: English
Date: May 2017
Refereed: Yes
Uncontrolled Keywords: Prediction market, Heterogeneous beliefs, Risk aversion, Favorite-longshot bias
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 23 Mar 2017 10:06
Last Modified: 26 Mar 2018 09:16
OAI ID: oai:tse-fr.eu:31579
URI: http://publications.ut-capitole.fr/id/eprint/23266

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