Anomalies in Probability Estimates for Event Forecasting on Prediction Markets

Abstract

Innovative forecasting methods using new data sources have been developed to address various problems in operations management, such as demand, sales, and event forecasts. One of the methods for forecasting events consists of prediction markets where participants can take financial positions that may generate returns depending on whether certain events occur or not. Results in experimental psychology and behavioral economics have shown that individuals, including experts, can be subject to judgment bias when making probability estimates for future events. We examine, in this study, whether prediction markets are immune to such bias in estimating event probability. We find that even when there are large numbers of transactions and high volumes of trades, probabilistic fallacies still occur. Moreover, when they occur, they tend to be persistent over a certain period of time, and they tend to happen in situations similar to the ones where individual probabilistic fallacies are reported to occur. Our results have implications for the design of prediction markets and at the same time call for caution when using forecasts generated this way.

Are CDS spreads predictable during the Covid-19 pandemic? Forecasting based on SVM, GMDH, LSTM and Markov switching autoregression

“… The efficient market theory The break in market efficiency The prediction models during Covid-19 Methodological framework CDS spread forecasting LSTM SVM GMDH MSA Fama, 1955 , Fama, 1970 , Jensen, 1978 , Malkiel, 1992 , Timmermann and Granger, 2004 . Gilchrist et al, 2016 , Abe and Nakayama, 2018 , Lee et al, 2020 Gaglione et al, 2020 , Pereira et al, 2020 , Chimmula and Zhang, 2020 , Colladon et al, 2020 , Katris, 2021 , Ghosh and Chaudhuri, 2021 . Li et al (2020), Peng et al (2020) , Lee et.…”

“…Forecasting the patterns of CDS also aims to break market efficiency caused by a certain process or event. A number of researchers believe that certain events or processes in the future may impair unbiased market efficiency ( Lee et al, 2020 ), with positive (negative) deviations affecting large positive (negative) excess returns ( Abe and Nakayama, 2018 ) or a change in spreads caused by economic shocks ( Gilchrist et al, 2016 ). From March 2020, the financial markets have had a new shock, caused by the global Covid-19 pandemic.…”