The Informational Content of the Limit Order Book: An Empirical Study of Prediction Markets

Abstract

In this paper I empirically investigate prediction markets for binary options. Advocates of prediction markets have suggested that asset prices are consistent estimators of the "true" probability of a state of the world being realized. I test whether the market reaches a "consensus." I find little evidence for convergence in beliefs. I then determine whether an econometrician using data beyond execution prices can leverage this data to estimate the consensus belief. I use an incomplete specification of equilibrium outcomes to derive bounds on beliefs from order submission decisions. Interval estimates of mean beliefs cannot exclude aggregate beliefs equal to 0.5.

Tasks

Reproductions