Aggregation of Information and Beliefs : Asset Pricing Lessons from Prediction Markets ∗

@inproceedings{Ottaviani2009AggregationOI,
  title={Aggregation of Information and Beliefs : Asset Pricing Lessons from Prediction Markets ∗},
  author={Ottaviani and Peter Norman},
  year={2009}
}
In a binary prediction market in which risk-neutral traders have heterogeneous prior beliefs and are allowed to invest a limited amount of money, the static rational expectations equilibrium price is demonstrated to underreact to information. This effect is consistent with a favorite-longshot bias, and is more pronounced when prior beliefs are more heterogeneous. Relaxing the assumptions of risk neutrality and bounded budget, underreaction to information also holds in a more general asset… CONTINUE READING

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