The 54 th Annual Conference of the New Zealand Association of Economists Wellington , July 3 - 5 , 2013 ARBITRAGE IN PREDICTION MARKETS Tram

A prediction market is a relatively new form of financial market whose ultimate purpose is to predict the outcome of an uncertain future event. This paper examines the extent of arbitrage in prediction markets and its implications for market efficiency. The most straightforward arbitrage opportunity in prediction markets is to exploit any divergence of the aggregate price of binary contracts predicting the same event from the contract payout. The existence of arbitrage is found in OCR prediction markets; however, its extent is small and negligible. The results found in this study provide supporting evidence for the efficiency of prediction markets.