Recession Prediction Markets and Macroeconomic Risk in Asset Prices

We examine 330,857 trades of prediction market contracts, the values of which are based on against-the-spread outcomes of NFL games, and find the presence of a significant reverse favourite-longshot bias. Surprisingly, the timing of this bias is identical to that observed in traditional casino-style NFL betting markets. That is, late-season away favourites so profoundly underperform expectations that the set of all favourites underperforms on average. Prior research shows that in prediction markets having asset prices ranging from $0 to $100, win rates are below (above) expectations when prices are low (high). However, we show that observed win rates for contracts on late-season away favourites are below expectations across all prices. The presence of a strong RFL bias in a prediction market provides evidence against the theories that this bias is caused by line shading or due to the effects of unpredicted weather variables on team performance.

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CAN PREDICTION MARKETS MITIGATE PRICE BIASES?

The Journal of Prediction Markets ◽

10.5750/jpm.v7i1.628 ◽

2013 ◽

Vol 7 (1) ◽

pp. 1-12

Author(s):

Richard Borghesi

Keyword(s):

Asset Prices ◽

Weather Conditions ◽

Relevant Information ◽

Prediction Markets ◽

Adverse Weather Conditions ◽

Adverse Weather ◽

Betting Markets ◽

Price Movements

This study examines the pre-game and within-game price movements of contracts listed on Tradesports to determine whether relevant information is quickly and accurately embedded into asset prices. Each contract represents a totals (over/under) bet on an NFL game. In traditional casino-style totals betting markets, it has been demonstrated that the effects of adverse weather conditions are not fully incorporated into totals bet prices. If prediction markets are more efficient that are traditional NFL betting markets, then this price bias should be mitigated. We find that while price biases disappear quickly after kickoff, prior to this point they remain largely intact suggesting that casino-style markets and prediction markets may have similar informational limitations.

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