Liquidity and Prediction Market Efficiency
Abstract
I investigate the relationship between liquidity and market efficiency using data from short-horizon binary outcome securities listed on the TradeSports exchange. I find that liquidity does not reduce—and sometimes increases—deviations of prices from financial and sporting event outcomes. One explanation is that limit order traders are naïve about other traders' knowledge and unwittingly bet against them, which can slow the response of prices to information. Consistent with this explanation, the limit orders that execute during informative time periods have negative expected returns; and limit orders often execute against traders who exploit the well-known favorite-longshot bias in prices.
Download PDF
Citation
Tetlock, Paul. "Liquidity and Prediction Market Efficiency." Working Paper, Columbia Business School, May 2008.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.