Efficiency Testing of Prediction Markets: Martingale Approach, Likelihood Ratio and Bayes Factor Analysis
The result's identifiers
Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216208%3A11320%2F21%3A10431336" target="_blank" >RIV/00216208:11320/21:10431336 - isvavai.cz</a>
Result on the web
<a href="https://verso.is.cuni.cz/pub/verso.fpl?fname=obd_publikace_handle&handle=JxzoS-k7Or" target="_blank" >https://verso.is.cuni.cz/pub/verso.fpl?fname=obd_publikace_handle&handle=JxzoS-k7Or</a>
DOI - Digital Object Identifier
<a href="http://dx.doi.org/10.3390/risks9020031" target="_blank" >10.3390/risks9020031</a>
Alternative languages
Result language
angličtina
Original language name
Efficiency Testing of Prediction Markets: Martingale Approach, Likelihood Ratio and Bayes Factor Analysis
Original language description
This paper studies efficient market hypothesis in prediction markets and the results are illustrated for the in-play football betting market using the quoted odds for the English Premier League. Our analysis is based on the martingale property, where the last quoted probability should be the best predictor of the outcome and all previous quotes should be statistically insignificant. We use regression analysis to test for the significance of the previous quotes in both the time setup and the spatial setup based on stopping times, when the quoted probabilities reach certain bounds. The main contribution of this paper is to show how a potentially different distributional opinion based on the violation of the market efficiency can be monetized by optimal trading, where the agent maximizes logarithmic utility function. In particular, the trader can realize a trading profit that corresponds to the likelihood ratio in the situation of one market maker and one market taker, or the Bayes factor in the situation of two or more market takers.
Czech name
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Czech description
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Classification
Type
J<sub>imp</sub> - Article in a specialist periodical, which is included in the Web of Science database
CEP classification
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OECD FORD branch
10102 - Applied mathematics
Result continuities
Project
<a href="/en/project/GA18-01137S" target="_blank" >GA18-01137S: Random Processes of Regression Quantiles in the Financial Risk Analysis</a><br>
Continuities
P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)
Others
Publication year
2021
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů
Data specific for result type
Name of the periodical
Risks [online]
ISSN
2227-9091
e-ISSN
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Volume of the periodical
9
Issue of the periodical within the volume
2
Country of publishing house
CH - SWITZERLAND
Number of pages
20
Pages from-to
31
UT code for WoS article
000623149300001
EID of the result in the Scopus database
2-s2.0-85100334306