Abstract
We use the data from the Iowa Electronic Markets to study factors associated with the ability of markets to predict future events. These are large-scale, real-money experimental markets with contract payoffs determined by political election outcomes. They provide data about individual trader characteristics and market micro-behavior which is not available from larger exchanges. In this study we find that market characteristics motivated by financial theory and previous experimental research account for most of the variance in predictive accuracy across sixteen markets. Three variables are particularly important: 1) the number of contract types traded, 2) pre-election market volumes and 3) differences in election eve (weighted) market bid and ask queues.
We thank Reinhard Selten for his continued support of the Iowa Electronic Markets and its predecessor, the Iowa Political Stock Market. With Professor Selten’s help and encouragement, we were able to bring this technology to Germany so that we could conduct a Unified Germany Election Market on the outcome of the December 1990 German Federal election. We also wish to thank Daniel Friedman, Forrest Nelson and participants in the 1995 Economic Science Association meetings for many helpful comments and suggestion.
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Berg, J., Forsythe, R., Rietz, T. (1997). What Makes Markets Predict Well? Evidence from the Iowa Electronic Markets. In: Albers, W., Güth, W., Hammerstein, P., Moldovanu, B., van Damme, E. (eds) Understanding Strategic Interaction. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-60495-9_34
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DOI: https://doi.org/10.1007/978-3-642-60495-9_34
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