Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets

Research output: Working paper › Research

Standard

Aggregation of Information and Beliefs : Asset Pricing Lessons from Prediction Markets. / Ottaviani, Marco; Sørensen, Peter Norman.

Department of Economics, University of Copenhagen, 2009.

Research output: Working paper › Research

Harvard

Ottaviani, M & Sørensen, PN 2009 'Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets' Department of Economics, University of Copenhagen.

APA

Ottaviani, M., & Sørensen, P. N. (2009). Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets. Department of Economics, University of Copenhagen.

Vancouver

Ottaviani M, Sørensen PN. Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets. Department of Economics, University of Copenhagen. 2009.

Author

Ottaviani, Marco ; Sørensen, Peter Norman. / Aggregation of Information and Beliefs : Asset Pricing Lessons from Prediction Markets. Department of Economics, University of Copenhagen, 2009.

Bibtex

@techreport{bc51ed5004e211df825d000ea68e967b,
title = "Aggregation of Information and Beliefs: Asset Pricing Lessons from Prediction Markets",
abstract = "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.",
keywords = "Faculty of Social Sciences, private information, heterogeneous prior beliefs, limited budget, underreaction",
author = "Marco Ottaviani and S{\o}rensen, {Peter Norman}",
note = "JEL classification: D82, D83, D84",
year = "2009",
language = "English",
publisher = "Department of Economics, University of Copenhagen",
address = "Denmark",
type = "WorkingPaper",
institution = "Department of Economics, University of Copenhagen",

}

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