Prediction Markets for the CFO – (PDF) – by Eric Zitzewitz – 2006-12-13

Prediction Market Event Studies

• Advantages:
– Can measure pre-event probability
– No guessing about event window length
– Can control for other news released with event (e.g., impact of 2004 election on 2008)
– Expands set of analyzable events (non-surprise events, events that never happen, events before they happen)

• But require even greater faith in efficient markets

• And provide new opportunities for correlation vs. causation confusion

Prediction market event studies yield much precise estimates than a traditional study.

—

Very interesting. When I created a new category at CFM, (Prediction Market) Analysts, the Irish feedback was that it was useless and redundant. I finally get vindicated. If I understand well what Triple Z [*] is saying, financial analysts should integrate the (real-money) prediction markets in their toolkit.

[*] To remind me that there are three Zs in his name.

—

Prediction Markets for the CFO – by Eric Zitzewitz – 2006-12-13