Information Efficiency in Speculative Markets

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Erwin Verbeek
206 g
208x146x12 mm

Speculative markets aggregate and display the dispersed beliefs of a multitude of individuals. Information efficiency, as the central issue, captures the question to which degree the market's prices reflect the fundamental value of the traded contracts.

Speculative markets are most common in the context of financial products such as stocks, bonds, or options. Beyond that, there is a growing popularity of betting markets, which offer the opportunity to trade on the outcome of events happening in the near future, such as political elections or sport games. These markets are often organized very similarly to financial markets but differ with respect to their informational environment. In contrast to the often very complex flow of information affecting the value of a financial product, the situation in betting markets is rather simple: the outcome of an event, as the contract's underlying, becomes observable after a pre-specified endpoint, and thereby serves as an indisputable benchmark against which the rationality of prices can be tested. A further reason making betting markets an interesting laboratory for financial theories is the coexistence of different market structures trading the same fundamentals. In the financial world, the conventional trading mechanisms are the quotedriven and the order-driven market. In sports betting, there is an equivalent for both of these market forms: the bookmaker setting and the bet exchange market, respectively.

Do speculative markets of these kinds provide accurate forecasts of real-world outcomes? Which information relevant to a contract's final value is not factored into present prices? Are price anomalies sensitive to market design? If researchers are about to understand and interpret investor behavior from a study of market prices, examining these questions is imperative. This work is an effort on this track. Using elaborate econometric methods and microeconomic modeling, Erwin Verbeek investigates the driving factors behind the predictive power of different information market settings. Grounded in quantitative analysis, the book comprehends suggestions not only for economic scientists but also for traders.

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