Gilder and Lerman hypothesised that past/present events can potentially assist in predicting future prices in prediction markets. They empirically revealed that prediction markets are surprisingly predictable, even by purely market-historical techniques.
Taking hold of the baton from Gilder and Lerma, Panos Ipeirotis and George Tziralis developed techniques for extracting news flow signals to see whether they can indeed be utilised to predict the future performance of markets on the InTrade prediction exchange. On the question of whether Hillary Clinton will be the Democratic Presidential Nominee in 2008, they noted-
Our sentiment index (in maroon) is close to 1 when we predict that the market will move higher, and it is close to 0 when we predict that the market will move down. Typically, it works pretty well for predicting long periods of price increases and declines. To put our money where our mouth is, the signal for the last few days shows that Hillary’-s market price will edge lower in the next few days/weeks.
Following on from this we looked at the Intrade prediction market and the Betfair markets on whether Hillary Clinton will be the Democratic Presidential Nominee in 2008, as of 10.45 GMT on December 3 2007. Whilst the Intrade market suggested that Clinton’-s probability of victory was 67%, the Betfair market gave a reading of 69%.
We returned to the Intrade prediction market and the Betfair market on whether Hillary Clinton will be the Democratic Presidential Nominee in 2008 at 08.45 GMT on December 7 2007.
Whilst the Intrade prediction market had previously suggested that Clinton’-s probability of victory was 67%, it was now suggesting that her probability of victory was 64%.
The Betfair market which had given a reading of 69% on Decmber 3 as regards her probability of winning the democratic nomination, was now suggesting that her probability of victory was only 50%.
It is quite clear, that the both sets of markets are responding to stale news, with Intrade significantly lagging behind Betfair, as regards its ability to aggregate all available news flow. Those that had sold Clinton on Betfair at 1.44 on December 3, on the back of Panos Ipeirotis and George Tziralis’- advice, are now sitting on a healthy profit. The claim that prediction markets are innefficient would seem to be gathering momentum…-. with the most likely cause being the fact that they are not liquid enough.
http://www.bettingmarket.com/predictionstale.htm
[Niall, don’t forget to send me your new e-mail address.]
My understanding is that Betfair odds moved from 1.44 to 1.50 (according to the screenshot in the original posting). While indeed this corresponds to a drop from 69% to 66% (an almost 4% drop in share price) this is not as drastic as a drop from 69% to 50% within such a short period of time. Plus, the Betfair drop from 69% to 66% is comparable with the drop in Intrade (from 67% to 64%).
Also, I am not sure about the liquidity hypothesis for explaining the inefficiency. An alternative explanation is the following:
Political markets are not stock markets. They reflect the aggregate opinion of the traders about public’s intention for the candidate. Notice that we have two levels of beliefs: one for what traders believe about the public’s intentions, and a second for what the public actually intends to vote for.
Not every member of the voting public reads every piece of information. When the same news are being repeated over and over in the mainstream news outlets, then more voters are influenced. Hence, the longer the news about a candidate stay around, the longer the public gets influenced by the same, stale news and changes intentions. This is correspondingly reflected in the prediction markets, potentially in an efficient manner.
This may indicate that it is not that the markets are not efficient, but that the voting public is not “efficient” (i.e., voters do not incorporate all the available information in their voting decisions.)
We can test this hypothesis by testing the efficiency/predictability of political prediction markets vs. the efficiency/predictability of non-political markets.
We will work further with George Tziralis on the topic, and we will keep you posted.
Political Prediction Markets: Some Thoughts
http://behind-the-enemy-lines……-some.html