THE EFFECT OF STOCK ENDOWMENTS ON THE LIQUIDITY OF PREDICTION MARKETS

Prediction markets are considered as a promising new forecasting method that has proven high prediction accuracy in many areas such as politics, sports, and business-related fields. The method is, however, far from being established or even understood. The specific circumstances and market designs t...

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Bibliographic Details
Published in:Journal of prediction markets 2012-12, Vol.2 (3), p.33-46
Main Authors: Seemann, Thomas, Hungenberg, Harald, Enders, Albrecht
Format: Article
Language:English
Subjects:
Endowment
Prediction markets
Online Access:Get full text
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Summary:Prediction markets are considered as a promising new forecasting method that has proven high prediction accuracy in many areas such as politics, sports, and business-related fields. The method is, however, far from being established or even understood. The specific circumstances and market designs that lead to efficient prediction markets need to be further identified. This paper tries to statistically analyze the impact of certain factors in market design. In particular, we analyze the impact of the initial endowments provided to new market participants on the liquidity of prediction markets. Market operators can provide either a cash endowment or a combination of a cash and stock endowment. By evaluating two play-money prediction markets run in parallel during the FIFA World Cup 2006, we show that the stock endowments significantly foster liquidity in the market. We recommend operators of online game markets as well as corporate prediction markets to provide stock and cash endowment to participants instead of pure cash endowments wherever feasible.
ISSN:1750-6751
1750-676X
DOI:10.5750/jpm.v2i3.445