Prediction Market Prices as Martingales: Theory and Analysis
نویسنده
چکیده
Introduction With prediction markets growing in number and in prominence in various domains, the construction of a modeling framework for the behavior of prices on traded contracts has become an increasingly important endeavor. In this paper, we present such a theoretical framework, as we attempt to use mar-tingale theory in the analysis of prediction market price fluctuations. The application of this theory to prediction market prices generates certain predictions regarding, in particular, win probabilities, the distribution of maximum and minimum prices, and the distribution of interval crossings, which we test using empirical data on contract prices for baseball matches from the online prediction marketplace Tradesports.
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