Prediction Markets in Theory and Practice Prediction Markets, sometimes referred to as “information markets,” “idea futures” or “event futures”, are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting b...

We propose a generalization of the Shirakawa (1991) model to capture the jump component in fixed income markets. The model is formulated under the Heath, Jarrow and Morton (1992) framework, and allows the presence of a Wiener noise and a finite number of Poisson noises, each associated with a time deterministic volatility function. We derive the evolution of the futures price and use this evolu...

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and infe...

It is often presumed that higher market volatility begets more active trading in derivatives markets. A number of empirical studies have confirmed that such a positive relationship between volatility and activity exists. However, those studies have usually drawn on analyses that apply mainly to daily or intraday data. Very few studies have considered the existence of a possible relationship bet...

This research compares derivative pricing model and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and...

We present analytical approximation formulæ for the price of interest rate futures contracts derived from the yield curve dynamics prescribed by a Libor market model allowing for an implied volatility skew generated by displaced diffusion equations. The derivation of the formulæ by the aid of Itô-Taylor expansions and heuristic truncations and transformations is shown, and the results are teste...