Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets
Publikation: Working paper › Forskning
Standard
Aggregation of Information and Beliefs : Asset Pricing Lessons from Prediction Markets. / Ottaviani, Marco; Sørensen, Peter Norman.
Department of Economics, University of Copenhagen, 2009.Publikation: Working paper › Forskning
Harvard
APA
Vancouver
Author
Bibtex
}
RIS
TY - UNPB
T1 - Aggregation of Information and Beliefs
T2 - Asset Pricing Lessons from Prediction Markets
AU - Ottaviani, Marco
AU - Sørensen, Peter Norman
N1 - JEL classification: D82, D83, D84
PY - 2009
Y1 - 2009
N2 - In a binary prediction market in which risk-neutral traders have heterogeneous prior beliefs and are allowed to invest a limited amount of money, the static rational expectations equilibrium price is demonstrated to underreact to information. This effect is consistent with a favorite-longshot bias, and is more pronounced when prior beliefs are more heterogeneous. Relaxing the assumptions of risk neutrality and bounded budget, underreaction to information also holds in a more general asset market with heterogeneous priors, provided traders have decreasing absolute risk aversion. In a dynamic asset market, the underreaction of the first period price is followed by momentum.
AB - In a binary prediction market in which risk-neutral traders have heterogeneous prior beliefs and are allowed to invest a limited amount of money, the static rational expectations equilibrium price is demonstrated to underreact to information. This effect is consistent with a favorite-longshot bias, and is more pronounced when prior beliefs are more heterogeneous. Relaxing the assumptions of risk neutrality and bounded budget, underreaction to information also holds in a more general asset market with heterogeneous priors, provided traders have decreasing absolute risk aversion. In a dynamic asset market, the underreaction of the first period price is followed by momentum.
KW - Faculty of Social Sciences
KW - private information
KW - heterogeneous prior beliefs
KW - limited budget
KW - underreaction
M3 - Working paper
BT - Aggregation of Information and Beliefs
PB - Department of Economics, University of Copenhagen
ER -
ID: 17083830