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  • 100% Prediction Markets for Economic Forecasting July 2012
    Erik Snowberg, Justin Wolfers, Eric Zitzewitz

    Prediction markets--markets used to forecast future events--have been used to accurately forecast the outcome of political contests, sporting events, and, occasionally, economic outcomes. This chapter summarizes the latest research on prediction markets in order to further their utilization by economic forecasters. We show that prediction markets have a number of attractive features: they quickly incorporate new information, are largely efficient, and impervious to manipulation. Moreover, markets generally exhibit lower statistical errors than professional forecasters and polls. Finally, we show how markets can be used to both uncover the economic model behind forecasts, as well as test existing economic models.

    ...Wolfers Eric Zitzewitz WORKING PAPER 18222 NBER WORKING PAPER SERIES PREDICTION MARKETS FOR ECONOMIC FORECASTING Erik Snowberg Justin Wolfers Eric Zitzewitz Working Paper 18222 http://www.nber.org/papers/w18222 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2012 This was prepared for the Handbook of Economic Forecasting, Volume 2. We dedicate this...

    /papers/w18222

  • 99% Prediction Markets in Theory and Practice March 2006
    Justin Wolfers, Eric Zitzewitz

    Prediction Markets, sometimes referred to as "information markets," "idea futures" or "event futures", are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.

    ...Wolfers and Eric Zitzewitz. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Prediction Markets in Theory and Practice Justin Wolfers and Eric Zitzewitz NBER Working Paper No. 12083 March 2006 JEL No. C53, D8, G14 ABSTRACT Prediction Markets, sometimes...

    /papers/w12083

  • 99% How Prediction Markets Can Save Event Studies April 2011
    Erik Snowberg, Justin Wolfers, Eric Zitzewitz

    This review paper articulates the relationship between prediction market data and event studies, with a special focus on applications in political economy. Event studies have been used to address a variety of political economy questions from the economic effects of party control of government to the importance of complex rules in congressional committees. However, the results of event studies are notoriously sensitive to both choices made by researchers and external events. Specifically, event studies will generally produce different results depending on three interrelated things: which event window is chosen, the prior probability assigned to an event at the beginning of the event window, and the presence or absence of other events during the event window. In this paper we show how each of these may bias the results of event studies, and how prediction markets can mitigate these biases.

    ...Justin Wolfers Eric Zitzewitz WORKING PAPER 16949 NBER WORKING PAPER SERIES HOW PREDICTION MARKETS CAN SAVE EVENT STUDIES Erik Snowberg Justin Wolfers Eric Zitzewitz Working Paper 16949 http://www.nber.org/papers/w16949 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 2011 We thank Jim Johnson, Matthew Kahn, Neil Malhotra and Stephanie Rickard for...

    /papers/w16949

  • 98% Five Open Questions About Prediction Markets February 2006
    Justin Wolfers, Eric Zitzewitz

    Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decision-making and risk management -- in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized.

    ...Justin Wolfers and Eric Zitzewitz. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Five Open Questions About Prediction Markets Justin Wolfers and Eric Zitzewitz NBER Working Paper No. 12060 February 2006 JEL No. C9, D7, D8, G1, M2 ABSTRACT Interest in...

    /papers/w12060

  • 98% Party Influence in Congress and the Economy December 2006
    Erik Snowberg, Justin Wolfers, Eric Zitzewitz

    To understand the extent to which partisan majorities in Congress influence economic policy, we compare financial market responses in recent midterm elections to Presidential elections. We use prediction markets tracking election outcomes as a means of precisely timing and calibrating the arrival of news, allowing substantially more precise estimates than a traditional event study methodology. We find that equity values, oil prices, and Treasury yields are slightly higher with Republican majorities in Congress, and that a switch in the majority party in a chamber of Congress has an impact that is only 10-30 percent of that of the Presidency. We also find evidence inconsistent with the popular view that divided government is better for equities, finding instead that equity valuations increase monotonically, albeit slightly, with the degree of Republican control.

    ...Wolfers Eric Zitzewitz WORKING PAPER 12751 NBER WORKING PAPER SERIES PARTY INFLUENCE IN CONGRESS AND THE ECONOMY Erik Snowberg Justin Wolfers Eric Zitzewitz Working Paper 12751 http://www.nber.org/papers/w12751 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2006 The authors would like to thank Keith Krehbiel, Marc Meredith and Betsey...

    /papers/w12751

  • 97% Interpreting Prediction Market Prices as Probabilities May 2006
    Justin Wolfers, Eric Zitzewitz

    While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution of beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs.

    ...Wolfers Eric Zitzewitz Working Paper 12200 http://www.nber.org/papers/w12200 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 2006 We would like to thank Ray Fair, Brian Galebach, Robin Hanson, Robert Hahn, Ed Kaplan, Brian Knight, Charles Manski, Marco Ottaviani, David Pennock, Erik Snowberg, Peter Norman Sørensen, Betsey Stevenson, Rob Stevenson and Abe...

    /papers/w12200

  • 96% Prediction Markets May 2004
    Justin Wolfers, Eric Zitzewitz

    We analyze the extent to which simple markets can be used to aggregate disperse information into efficient forecasts of uncertain future events. Drawing together data from a range of prediction contexts, we show that market-generated forecasts are typically fairly accurate, and that they outperform most moderately sophisticated benchmarks. Carefully designed contracts can yield insight into the market's expectations about probabilities, means and medians, and also uncertainty about these parameters. Moreover, conditional markets can effectively reveal the market's beliefs about regression coefficients, although we still have the usual problem of disentangling correlation from causation. We discuss a number of market design issues and highlight domains in which prediction markets are most likely to be useful.

    ...Wolfers Eric Zitzewitz Working Paper 10504 http://www.nber.org/papers/w10504 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2004 Prepared for the Journal of Economic Perspectives. The authors would like to thank David Pennock, Emile Servan-Schreiber of NewsFutures, David Dempsey a nd John Delaney of Tradespor ts, Alison Fealey and Oliver Frankel of...

    /papers/w10504

  • 96% Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections March 2006
    Erik Snowberg, Justin Wolfers, Eric Zitzewitz

    Analyses of the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during Election Day. Analyzing high frequency financial fluctuations following the release of flawed exit poll data on Election Day 2004, and then during the vote count, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2 3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.

    ...Justin Wolfers Eric Zitzewitz Working Paper 12073 http://www.nber.org/papers/w12073 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2006 The authors would like to thank Gerard Daffy, John Delaney, Paul Rhode and Koleman Strumpf for data, Meredith Beechey, Jon Bendor, Ray Fisman, Ben Jones, Tom Kalinke, Brian Knight, Andrew Leigh, Paul Rhode, Cameron Shelton...

    /papers/w12073

  • 93% Competing Approaches to Forecasting Elections: Economic Models, Opinion Polling and Prediction Markets February 2006
    Andrew Leigh, Justin Wolfers

    We review the efficacy of three approaches to forecasting elections: econometric models that project outcomes on the basis of the state of the economy; public opinion polls; and election betting (prediction markets). We assess the efficacy of each in light of the 2004 Australian election. This election is particularly interesting both because of innovations in each forecasting technology, and also because the increased majority achieved by the Coalition surprised most pundits. While the evidence for economic voting has historically been weak for Australia, the 2004 election suggests an increasingly important role for these models. The performance of polls was quite uneven, and predictions both across pollsters, and through time, vary too much to be particularly useful. Betting markets provide an interesting contrast, and a slew of data from various betting agencies suggests a more reasonable degree of volatility, and useful forecasting performance both throughout the election cycle and across individual electorates.

    ...Wolfers Working Paper 12053 http://www.nber.org/papers/w12053 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2006 Wolfers gratefully acknowledges the support of a Hirtle, Callaghan and Co. – Arthur D. Miltenberger Research Fellowship, and the support of Microsoft Research and the Zell/Lurie Real Estate Center. We are grateful to Lisa Cameron, Mark...

    /papers/w12053

  • 93% What Do Financial Markets Think of War in Iraq? March 2003
    Andrew Leigh, Justin Wolfers, Eric Zitzewitz

    We analyze financial market data in order to produce an ex-ante assessment of the economic consequences of war with Iraq. The novel feature of our analysis derives from the existence of a market for Saddam Securities,' a new future traded on an online betting exchange that pays only if Saddam Hussein is ousted. A variety of tests suggest that this future's price provides a plausible estimate of the probability of war. The spot oil price has moved closely with the Saddam Security, suggesting that war raises oil prices by around $10 per barrel. Futures prices imply that markets expect these large immediate disruptions to dissipate quickly, with prices returning to pre-war levels within about a year and a half. Evidence on the long-run effects is fragile, and while prices are probably expected to fall a little as a result of war, any oil dividend' will be minimal. We find large effects in equity markets: and war lowers the value of U.S. equities by around 15 percent. This effect is concentrated in the consumer discretionary sector, airlines and IT; the prospect of war bolsters the gold and energy sectors. Analyzing option prices, we find that the large estimated average effects of war reflect the market pricing in a range of different scenarios - a 70 percent probability that it will lead to market declines of 0 to 15 percent, a 20 percent chance of 15 to 30 percent declines, and a 10 percent risk of a fall in excess of 30 percent. Across countries, the most extreme effects are on the stock markets of Turkey, Israel, and several European nations. Countries that are highly enmeshed in the world economy, or net oil importers, are most likely to experience adverse effects from war.

    ...Wolfers Eric Zitzewitz Working Paper 9587 http://www.nber.org/papers/w9587 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2003 The authors would like to thank Lanier Benkard, Jeremy Bulow, Tim Bresnahan, Macgregor Duncan, Peter Henry, Dean Karlan, Ilan Kremer, Lars Lefgren, Steve Levitt, Ulrike Malmendier, Alfredo Marti, John McMillan, Paul Oyer, Jon...

    /papers/w9587

  • 90% Does Transparency Reduce Favoritism and Corruption? Evidence from the Reform of Figure Skating Judging January 2012
    Eric Zitzewitz

    Transparency is usually thought to reduce favoritism and corruption by facilitating monitoring by outsiders, but there is concern it can have the perverse effect of facilitating collusion by insiders. In response to vote trading scandals in the 1998 and 2002 Olympics, the International Skating Union (ISU) introduced a number of changes to its judging system, including obscuring which judge issued which mark. The stated intent was to disrupt collusion by groups of judges, but this change also frustrates most attempts by outsiders to monitor judge behavior. I find that the "compatriot-judge effect", which aggregates favoritism (nationalistic bias from own-country judges) and corruption (vote trading), actually increased slightly after the reforms.

    ...Zitzewitz. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Does Transparency Reduce Favoritism and Corruption? Evidence from the Reform of Figure Skating Judging Eric Zitzewitz NBER Working Paper No. 17732 January 2012 JEL No. D7,D8 ABSTRACT Transparency...

    /papers/w17732

  • 90% DigestNov2004.qxd
    fcars

    ...Wolfers and Eric Zitzewitz describe the types of contracts that might be traded in prediction markets and then survey several applications, with special attention to market design issues. Finally, they assess the predictive value of such markets. “By election day, the markets, with an average absolute error of around 1.5 percentage points, were considerly more accurate than the Gallup poll...

    /digest/nov04/nov04.pdf

  • 90% Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk June 2005
    Refet Gürkaynak, Justin Wolfers
    in NBER International Seminar on Macroeconomics 2005, Jeffrey A. Frankel and Christopher Pissarides, editors

    ...Wolfers URL: http://www.nber.org/chapters/c0355 Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk Refet S. Giirkaynak, Bilkent University and CEPR Justin Wolfers, University of Pennsylvania, CEPR, IZA, and NBER 1. Introduction In 1993 Robert Shiller forcefully argued for the creation of a new set of securities tied to the future path of the...

    /chapters/c0355

  • 89% Using a Free Permit Rule to Forecast the Marginal Abatement Cost of Proposed Climate Policy May 2016
    Kyle C. Meng

    This paper develops a method for forecasting the marginal abatement cost (MAC) of climate policy using three features of the failed Waxman-Markey bill. First, the MAC is revealed by the price of traded permits. Second, the permit price is estimated using a regression discontinuity design (RDD) comparing stock returns of firms on either side of the policy’s free permit cutoff rule. Third, because Waxman-Markey was never implemented, I extend the RDD approach to incorporate prediction market prices which normalize estimates by policy realization probabilities. A final bounding analysis recovers a MAC range of $5 to $19 per ton CO2e.

    ...Wolfers, and seminar participants at Columbia University, Environmental Defense Fund, Georgia Tech, Harvard Kennedy School, IZA, NBER EEE Summer Institute, New York Fed, Rutgers, Stanford, UC Irvine, UC Santa Barbara, University of Connecticut, and University of Michigan. I am particularly grateful to Richard Goettle, Jennifer Morris, and Sergey Paltsev for sharing output from the IGEM and EPPA...

    /papers/w22255

  • 87% 2007number3

    ...and Wolfers compare different approaches for predicting elections, and Wolfers and Zitzewitz focus in particular on close elections and their ex ante unpredictability, a topic investigated in a different context by Chang. 20 Snowberg studies the effect of elections on policies, using unpredictable elections to isolate "shocks". 21 Vigdor and Mullainathan and Washington investigate voters...

    /reporter/2007number3

  • 87% Archive of NBER Papers on Asset Pricing

    ...Wolfers Eric Zitzewitz Prediction Markets for Economic Forecasting w18169 Kent Daniel Ravi Jagannathan Soohun Kim Tail Risk in Momentum Strategy Returns w18174 Nicola Gennaioli Andrei Shleifer Robert W. Vishny Money Doctors w18173 William N. Goetzmann Sharon Oster Competition Among University Endowments w18181...

    /papersbyprog/AP_archive.html

  • 86% Archive of New National Bureau of Economic Research Working Papers and Books

    ...Wolfers and Eric Zitzewitz #12083 (EFG, AG) Measuring Trends in Leisure: The Allocation of Time Over Five Decades Mark Aguiar and Erik Hurst #12082 (EFG, LS) The Depressing Effect of Agricultural Institution on the Prewar Japanese Economy Fumio Hayashi and Edward C. Prescott #12081 (EFG, PR) Insurance and Incentives for Medical Innovation Alan M. Garber, Charles I. Jones, and Paul M. Romer...

    /new_archive/mar06.html

  • 85% Interpreting the Predictions of Prediction Markets March 2004
    Charles F. Manski

    Participants in prediction markets such as the Iowa Electronic Markets trade all-or-nothing contracts that pay a dollar if and only if specified future events occur. Researchers engaged in empirical study of prediction markets have argued broadly that equilibrium prices of the contracts traded are market probabilities' that the specified events will occur. This paper shows that if traders are risk-neutral price takers with heterogenous beliefs, the price of a contract in a prediction market reveals nothing about the dispersion of traders' beliefs and partially identifies the central tendency of beliefs. Most persons have beliefs higher than price when price is above 0.5, and most have beliefs lower than price when price is below 0.5. The mean belief of traders lies in an interval whose midpoint is the equilibrium price. These findings persist even if traders use price data to revise their beliefs in plausible ways.

    ...Wolfers, and Zitzewitz (2003) have interp reted the price of a Saddam Security as a market-generated probability of war with Iraq prior to the specified date. Prediction markets achieved some notoriety in the summer of 2003, when, following public criticism, the Defense Advanced Research Proj ects Agency (DARPA) of the U.S. Department of Defense terminated development of its "Future Markets...

    /papers/w10359

  • 84% Comment on "Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty, and Risk" June 2005
    Adam Szeidl
    in NBER International Seminar on Macroeconomics 2005, Jeffrey A. Frankel and Christopher Pissarides, editors

    ...Wolfers and Zitzewitz (2005) show that with risk-averse investors and a competitive market, the price will equal the wealth-weighted average belief in the population. This result confirms that market prices can depart from true expectations if the distribution of beliefs is correlated with wealth. On the other hand, in this model, accurate market prices obtain if the average belief in the...

    /chapters/c0357

  • 83% Archive of NBER Papers on Law and Economics

    ...Justin Wolfers Subjective Well-Being and Income: Is There Any Evidence of Satiation? w18994 Jason M. Lindo Jessamyn Schaller Benjamin Hansen Caution! Men Not at Work: Gender-Specific Labor Market Conditions and Child Maltreatment w19001 Maija Halonen-Akatwijuka Oliver D. Hart More is Less: Why Parties May Deliberately Write Incomplete Contracts...

    /papersbyprog/LE_archive.html

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