Arbitrage in Political Prediction Markets

Online prediction markets are a powerful tool for aggregating information and show promise as predictive tools for uncertain outcomes, from sporting events to election results. However, these markets only serve as effective prediction tools so long as the market pricing remains efficient. We analyze the potential arbitrage profits derived from such mispricings in two leading American political prediction markets, PredictIt (for the 2016 and 2020 elections) and the Iowa Electronic Markets (for the 2016 election), to quantify the degree of mispricing and to show how market design can contribute to price distortion. We show that contracts hosted by PredictIt, compared to the IEM, are chronically mispriced, with large arbitrage profits in the 2016 election markets and non-negligible profits for the 2020 markets. We discuss the role of profit fees and contract limits, the primary differences between the PredictIt and IEM, in distorting pricing on PredictIt by limiting the ability of traders to capture arbitrage profits. Additionally, we examine the association between arbitrage and margin-linking, increased liquidity, and the number of unique contracts PredictIt's markets. This research provides cautionary evidence of potential inefficiencies in prediction markets with the intention of improving market implementation and enhancing market predictiveness

Prediction Markets:A literature review 2014

In recent years, Prediction Markets gained growing interest as a forecasting tool among researchers as well as practitioners, which resulted in an increasing number of publications. In order to track the latest development of research, comprising the extent and focus of research, this article provides a comprehensive review and classification of the literature related to the topic of Prediction Markets. Overall, 304 relevant articles, published in the timeframe from 2007 through 2013, were identified and assigned to a herein presented classification scheme, differentiating between descriptive works, articles of theoretical nature, application-oriented studies and articles dealing with the topic of law and policy. The analysis of the research results reveals that more than half of the literature pool deals with the application and actual function tests of Prediction Markets. The results are further compared to two previous works published by Zhao, Wagner and Chen (2008) and Tziralis and Tatsiopoulos (2007a). The article concludes with an extended bibliography section and may therefore serve as a guidance and basis for further research. (250 WORDS

Forecasting Economic Indices - Design, Performance, and Learning in Prediction Markets

Macroeconomic forecasts are used extensively in industry and government even though the historical accuracy and reliability is disputed. This thesis develops and studies a prediction market designed to forecast macro-economic indicators in Germany. The market forecasts performed well in comparison to the \u27Bloomberg\u27-survey forecasts. Distinguishing between trading behavior and performance the thesis provides insights into the interplay between interface, information and decision-making

Continuous Market Engineering - Focusing Agent Behavior, Interfaces, and Auxiliary Services

Electronic markets spread out amongst business entities as well as private individuals. Albeit numerous approaches on developing electronic markets exist, a unified approach targeting market development, redesign, and refinement has been lacking. This thesis studies the potential of continuously improving electronic markets. Thereby, the experiments? design focuses on Agent Behavior, Interfaces, and Auxiliary Services and thus unveils the potential of continuously improving electronic markets