Document de travail

Necessary and Sufficient Conditions for Prediction Market Accuracy

Xue-Zhong He et Nicolas Treich

Résumé

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.

Mots-clés

Prediction market; heterogeneous beliefs; risk aversion; favorite-longshot bias; and asset prices;

Référence

Xue-Zhong He et Nicolas Treich, « Necessary and Sufficient Conditions for Prediction Market Accuracy », février 2011.

Voir aussi

Publié dans

février 2011