improving prediction market forecasts by detecting and correcting possible over reaction to price movements abstract we examine the impact of price trends on the accuracy of forecasts from prediction markets in particular we study an electronic betting exchange market and construct independent variables from market price odds time series from 6058 individual markets a dataset consisting of over 8 4 million price points using a conditional logit model we find that a systematic relationship exists between trends in odds and the accuracy of odds implied event probabilities the relationship is consistent with participants over reacting to price movements in particular in different time segments of the market increasing and decreasing odds lead respectively to under and over estimation of odds implied probabilities we develop a methodology to detect and correct the erroneous forecasts associated with these trends in odds in order to considerably improve the quality of forecasts generated in prediction markets

information and efficiency goal arrival in soccer betting an efficient market incorporates news into prices immediately and fully tests for efficiency in financial markets have been undermined by information leakage we test for efficiency in sports betting markets real world markets where news breaks remarkably cleanly applying a novel identification to high frequency data we investigate the reaction of prices to goals scored on the cusp of half time this strategy allows us to separate the market s response to major news a goal from its reaction to the continual flow of minor game time news on our evidence prices update swiftly and fully

the effect of fast trading on price discovery and efficiency evidence from a betting exchange abstract we examine how the presence of fast traders impacts price discovery and efficiency in a real world setting i e courtsiding the activity of live betting from a tennis stadium this setting allows us to isolate the activity of fast acting traders who have a short term monopolistic access to important information with respect to other traders who trade based on delayed tv images using live tennis betting data combined with detailed point by point match data our results show that courtsider trading promotes quick price discovery and correctly incorporates new information into prices we estimate that a simple trading strategy yields a positive trading return to fast traders after the occurrence of important informational events

declining volatility in the u s automobile industry dramatic changes in the volatility of output occurred in the u s auto industry in the early 1980s namely output volatility declined the covariance of inventory investment and sales grew more negative and adjustments to production schedules which in earlier decades stemmed primarily from plants hiring and laying off workers were more often accomplished with changes in average hours per worker after the mid 1980s using a linear quadratic inventory model with intensive and extensive labor adjustments we show how all of these changes could have stemmed from one underlying factor a decline in the persistence of motor vehicle sales jel g31 l25 l62 m11

growth and the effects of inflation abstract in this paper we study the relationship between the rate of increase of the money supply and the rate of growth of output in an economy we show that in some models of endogenous growth inflation has direct effects on the growth rate of the economy despite this the estimated welfare cost of inflation from calibrated examples is similar to that found in exogenous growth models

markups aggregation and inventory adjustment in this paper i suggest a unified explanation for two puzzles in the inventory literature first estimates of inventory speeds of adjustment in aggregate data are very small relative to the apparent rapid reaction of stocks to unanticipated variations in sales second estimates of inventory speeds of adjustment in firm level data are significantly higher than in aggregate data the paper develops a multisector model where inventories are held to avoid stockouts and price markups vary along the business cycle the omission of countercyclical markup variations from inventory targets introduces a downward bias in estimates of adjustment speeds obtained from partial adjustment models when the cyclicality of markups differs across sectors this downward bias is shown to be more severe with aggregate rather than firm level data similar results apply not only to inventories but also to labor and prices montercarlo simulations of a calibrated version of the model suggest that these biases are quantitatively significant

understanding the inventory cycle abstract careful examination of aggregate data from the u s and other oecd countries reveals that production and inventory behavior exhibit paradoxical features 1 inventory investment is strongly countercyclical at very high frequencies e g 2 3 quarters per cycle it is procyclical only at relatively low cyclical frequencies such as the business cycle frequencies e g 8 40 quarters per cycle 2 production is less volatile than sales around the high frequencies it is more volatile than sales only around business cycle or lower frequencies 3 unlike capital investment or gdp the bulk of the variance of inventory investment is concentrated around high frequencies rather than around business cycle frequencies these features of production and inventory behavior at the low and high frequencies provide a litmus test for inventory theories this paper shows that the stockout avoidance theory kahn j 1987 inventories and the volatility of production american economic review 77 667 679 has much better potential than other competing theories for explaining the seemingly paradoxical features of inventory fluctuations observed at different cyclical frequencies my analysis suggests that demand shocks are the main source of the business cycle

taking stock a critical assessment of recent research on inventories empirical and theoretical aspects of inventory behavior became hot topics in the 1950s and early 1960s no one seemed to notice the tension that was developing between the emerging macroeconomic and microeconomic views of inventories macroeconomists routinely thought of inventories as a destabilizing factor yet the prevailing micro theory viewed inventories as a stabilizing factor it was a fascinating question that was barely explored instead somewhat inexplicably interest in inventories dried up as if inventories were of minor economic significance and little intrinsic interest by the early 1980s then economists once again knew something they had known in the 1950s that inventory investment is of first order importance in business cycles but they were also beginning to realize that the standard production smoothing buffer stock model of inventories was in deep trouble this paper focuses on developments since that realization

relative pricing of binary options in live soccer betting markets abstract live soccer betting markets differ from other binary options markets in that all fundamental information is observable the options mature in less than two hours and the markets are highly liquid this study presents a new method for the identification of hidden information in market prices the method is based on two independent poisson distributions and on a numerical algorithm for the aggregation of all market price information into one rational number the method is applied to an empirical dataset of real time market prices in 29 413 soccer games the results indicate that the method selects the most profitable markets and allows for a significant improvement in average investment returns

predicting catastrophe risk evidence from catastrophe bond markets abstract compared to the past literature on prediction markets that uses small scale observational field data or experiments this present research examines the efficiency of such markets by studying catastrophe cat bonds we collect actual catastrophe loss data match them with the defined trigger events of each cat bond contract and then employ an empirical pricing framework to obtain the excess cat premiums in order to represent the market based forecasts our results indeed show that market based forecasts have more significant predictive content for future cat losses than professional forecasts that use natural catastrophe risk models although the predictive information for cat events is specialized and complex our evidence supports that cat bond markets are successful prediction markets that efficiently aggregate information about future cat losses our resultsalso highlight that actual cat losses in future periods can explain the excess cat bond spreads in the primary market and provide support for market efficiency when pricing cat risk

rational expectations and the aggregation of diverse information in laboratory security markets the idea that markets might aggregate and disseminate information and also resolve conflicts is central to the literature on decentralization hurwicz 1972 and rational expectations lucas 1972 we report on three series of experiments all of which were predicted to have performed identically by the theory of rational expectations in two of the three series one in which participants trade a complete set of arrow debreu securities and a second in which all participants have identical preferences double auction trading leads to efficient aggregation of diverse information and rational expectations equilibrium failure of the third series to exhibit such convergence demonstrates the importance of market institutions and trading instruments in achievement of equilibrium

interrelated demands for buffer stocks and productive inputs estimates for two digit manufacturing industries empirical estimates of interrelated factor demand equations for inventories labor inputs capital stocks and unfilled orders in selected two digit industries are provided this framework is more comprehensive than previous research as it disaggregates inventories by stage of fabrication accounts for production to stock and production to order and disaggregates capital and labor inputs all estimated decision rules display stock adjustment effects but there are asymmetries in the parameter estimates that are puzzling there is evidence that factor input prices have a role in explaining stock levels but own factor price effects are largely absent evidence is uncovered that stocks are sensitive to expectations errors attached to output demand copyright 1990 by mit press

production chains and general equilibrium aggregate dynamics abstract recent empirical studies reveal that monetary shocks can cause persistent fluctuations in aggregate output in this paper we propose a mechanism to help generate such persistence our dynamic stochastic general equilibrium model features a vertical input output structure with staggered price contracts at each stage of production working through the input output relations and the timing of firms pricing decisions the model generates persistent fluctuations in aggregate output and the observed patterns of price dynamics following a monetary shock output responses are more persistent the greater the number of stages of production and the larger the share of intermediate inputs with a sufficient number of stages the persistence is arbitrarily large if the share of intermediate inputs is one at all but finitely many stages

inventory investment and output volatility abstract this paper reports the results of a detailed examination of the hypothesis that improved inventory management and production techniques are responsible for the decline in the volatility of u s gdp growth our innovations are to look at the data at a finer level of disaggregation than previous studies to exploit cross sectional heterogeneity to obtain clearer identification of this hypothesis and to provide a complete decomposition of the change in gdp volatility at the aggregate level changes in inventory behavior can account directly for almost half of the total reduction in gdp volatility however reduced volatility of sales and lower covariance among the output of major sectors in the economy each account for more than one fourth of the reduction in gdp volatility improved inventory management appears to be associated loosely with lower volatility at the industry level

on the employment effects of productivity shocks the role of inventories demand elasticity and sticky prices abstract whether technological progress raises or lowers employment in the short run has been the subject of much debate in the recent years we show that cross industry differences in inventory holding costs demand elasticities and price rigidities potentially all affect employment decisions in the face of productivity shocks in particular the employment response to a permanent productivity shock is more likely to be positive the less costly it is to hold inventories the more elastic industry demand is and the more flexible prices are using data on 458 4 digit u s manufacturing industries over the period 1958 1996 we find statistically significant effects of variations in inventory holdings and demand elasticities on short run employment responses but less conclusive evidence pertaining to the effects of measured price stickiness

unifying underreaction anomalies this paper asks whether momentum and postevent drift are manifestations of the same underlying mechanism or are separate phenomena we find that both effects can be attributed to persistence in returns following news that affects expected earnings or earnings growth holding these quantities fixed there is no momentum effect nor is there postevent drift for our sample of events which includes seasoned equity offerings repurchases equity financed mergers and dividend initiations and omissions the implication is that return continuation follows fundamental news in general and in aggregate this explains momentum

inventories as factors of production and economic fluctuations this paper presents a theory of inventory investment by stage of processing and uses it to examine the role of inventory investment in economic fluctuations the model in which inventories are treated as factors of production is estimated for four durable goods industries three conclusions emerge from the estimation first the estimates generally satisfy the theoretical restrictions second the elasticity of inventory demand with respect to output is high indicating an important accelerator effect finally the estimates suggest that shifts in the demand for inventories are an important source of economic fluctuations copyright 1989 by american economic association

the role of surprise understanding overreaction and underreaction to unanticipated events using in play soccer betting market abstract previous research in finance has found evidences of both overreaction and underreaction to unanticipated events but has yet to explain why investors overreact to certain events while underreacting to others in this paper we hypothesize that while market participants generally underreact to new events due to conservatism the extent of underreaction is moderated by surprise thus causing market participants to overreact to events that are highly surprising we test our hypothesis using data from an in play soccer betting market where new events goals are clearly and exogenously defined and the degree of surprise can be directly quantified goals scored by underdogs are more surprising we provide both statistical and economic evidences in support of our hypothesis

the degree of inefficiency in the football betting market statistical tests abstract this paper tests the hypothesis that the football betting market is efficient our statistical tests are stronger than those in previous studies and we examine both nfl and college data over a sample period of fifteen years our statistical tests detect two specific biases in the nfl market and an unspecified bias in the college market we examine the year to year consistency and magnitudes of the biases and find that the nfl bias against home teams has been nearly eliminated while the bias against underdogs has increased profitable exploitation of the biases depends upon transaction costs

the pitch rather than the pit investor inattention trading activity and fifa world cup matches this paper analyzes stock market trading in 15 countries during the 2010 and 2014 soccer fifa world cups we find evidence for substantial investor inattention during these major sporting events the lack of attention for the trading pit is particularly large when the national soccer team is competing with traded volumes declining by as much as 48 during national team matches prices on local stock markets can temporarily decouple from global financial market developments these findings suggest that major sporting events can act as a laboratory in which to investigate investor inattention

on money and capital with durable goods abstract if expenditures on non durables are more heavily financed with money than expenditures on durables then after an increase in the inflation rate there will be capital deccumulation followed by capital accumulation money is superneutral in the long run

inventories and the volatility of production a stylized fact associated with inventory behavior is that the variance of production exceeds the variance of sales this paper presents a model of production decisions with demand uncertainty that incorporates no nnegativity constraints on inventories even with no productivity shocks optimal behavior by the firm is consistent with this stylized fact either if demand exhibits positive serial correlation or if the firm can backlog excess demand the reason is that a demand shock affects both the actual inventory level given unchanged production and the desired level production must replenish the stock and adjust to the new desired level copyright 1987 by american economic association

internet based virtual stock markets for business forecasting the application of internet based virtual stock markets vsms is an additional approach that can be used to predict short and medium term market developments the basic concept involves bringing a group of participants together via the internet and allowing them to trade shares of virtual stocks these stocks represent a bet on the outcome of future market situations and their value depends on the realization of these market situations in this process a vsm elicits and aggregates the assessments of its participants concerning future market developments the aim of this article is to evaluate the potential use and the different design possibilities as well as the forecast accuracy and performance of vsms compared to expert predictions for their application to business forecasting after introducing the basic idea of using vsms for business forecasting we discuss the different design possibilities for such vsms in three real world applications we analyze the feasibility and forecast accuracy of vsms compare the performance of vsms to expert predictions and propose a new validity test for vsm forecasts finally we draw conclusions and provide suggestions for future research

linear rational expectations equilibrium laws of motion for selected u s raw material imports in this paper the authors develop and estimate time series models of the rational expectations equilibrium laws of m otion for several u s commodity imports bauxite cocoa coffee and petroleum the theoretical model is based upon the optimizing behavi or of firms that import in the presence of supply shocks delivery la gs and adjustment and inventory holding costs one of the important features of the empirical model is that the authors are able to estim ate elasticities that distinguish between responses to changes in the environment that importers expect to be relatively temporary versus relatively permanent copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

information processing constraints and asset mispricing i analyse a series of natural quasi experiments centred on betting exchange data on the wimbledon tennis championships to determine whether information processing constraints are partially responsible for mispricing in asset markets i find that the arrival of information during each match leads to substantial mispricing between two equivalent assets and that part of this mispricing can be attributed to differences in the frequency with which the two prices are updated inplay this suggests that information processing constraints force the periodic neglect of one of the assets thereby causing substantial albeit temporary mispricing in this simple asset market

trend breaks in us inventory to sales ratios abstract this paper documents econometrically that us inventory to sales ratios have time trends and that there have been significant breaks in these time trends at both the aggregate and industry level using techniques developed by bai rev econ stat 1997 551 and by bai and perron econometrica 66 1 1998 47 we simultaneously estimate the time trend parameters and the dates of statistically significant breaks in those trends using data from 1967 through 2001 it is estimated that aggregate manufacturing and trade inventory to sales ratio trended upwards at a 0 76 year rate before 1985 q3 and has trended downwards at a 1 29 year rate since then downtrends are estimated to have begun in manufacturing ratios in 1983 wholesalers in 1985 and retailers in 1990 before the mid 1990s nearly all the reductions in ratios occurred in industries carrying durable goods examination of the timing and possible explanations of trend breaks for the 20 two digit manufacturing industries suggests that breaks are much more likely to have occurred in recessions and may be related to changes in the variance of the industry s sales growth rate

why do real and nominal inventory sales ratios have different trends this note explains the diverging trends between real and nominal aggregate inventory sales ratios the combined effect of two features of the data explains the divergence first while aggregate sales include both goods and services inventories include only goods second there has been a strong secular decrease in the relative price of goods the combination of these two factors causes the real and nominal aggregate inventory sales ratios to have different trends

intersectoral labor mobility and the growth of the service sector one of the most striking changes in the u s economy over the past 50 years has been the growth in the service sector between 1950 and 2000 service sector employment grew from 57 to 75 percent of total employment however over this time the real hourly wage in the service sector grew only slightly faster than in the goods sector in this paper we assess whether or not the essential constancy of the relative wage implies that individuals face small costs of switching sectors and we quantify the relative importance of labor supply and demand factors in the growth of the service sector we specify and estimate a two sector labor market equilibrium model that allows us to address these empirical issues in a unified framework our estimates imply that there are large mobility costs output in both sectors would have been double their current levels if these mobility costs had been zero in addition we find that demand side factors that is technological change and movements in product and capital prices were responsible for the growth of the service sector

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

input and output inventories in general equilibrium we build and estimate a two sector goods and services dynamic stochastic general equilibrium model with two types of inventories materials input inventories facilitate the production of nished goods while nished goods output inventories yield utility services the model is estimated using bayesian methods the estimated model replicates the volatility and cyclicality of inventory investment and inventory to target ratios although inventories are an important element of the model s propagation mechanism shocks to inventory e ciency or management are not an important source of business cycles when the model is estimated over two subperiods pre and post 1984 changes in the volatility of inventory shocks or in structural parameters associated with inventories such as the input inventory to output ratio play a small role in reducing the volatility of output

measuring the contribution of durable goods to the welfare cost of inflation in this paper we measure the contribution of durable goods to the welfare cost of inflation in the context of an endogenous growth model with durable and nondurable goods where purchases of the latter require only a partial cash payment compared with the former unlike existing measures our proposed welfare measure is computationally efficient and relatively easy to implement we find that durability adds a significant component to the welfare costs of inflation