The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Friday, June 09, 2006

Predictive Markets for the World Cup?

I just read the latest Buttonwood column on The Economist magazine's website -- Trading World Cup volatility (June 6, 2006). The article discusses various electronic exchanges that mimic stock and derivatives exchanges. The key difference is that the 'shares' are of the 32 national teams playing in this year's World Cup in Germany.

The pricing of these 'shares' on almost all of the various electronic markets are based on the probabilities of a particular team winning. In theory, one could use the information gleaned from these sites in order to make predictions on how the various soccer/football teams will do during the World Cup. At the very least, one can study what type of information affects prices/subjective probabilities and where the consensus of opinion seem to be headed toward.

The World Cup market is one example of a predictive market. Predictive (or prediction or information) markets have been set up by economists (and others) in order to use market mechanisms to determine the most likely outcomes of political contests, sporting events, and other non-economic events. For the most part, these markets have done a pretty good job (at least better than the alternatives) at making predictions. A good overview of prediction/predictive markets can be found in the following working paper on Justin Wolfer's website: http://bpp.wharton.upenn.edu/jwolfers/Papers/PredictionMarkets(Palgrave).pdf

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