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

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.

Available Versions of this Item

• Heterogeneous Beliefs and Prediction Market Accuracy. (deposited 09 Jul 2014 17:35)
  • Prediction market prices under risk aversion and heterogeneous beliefs. (deposited 23 Mar 2017 10:06) [Currently Displayed]