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22 April 2022 On the price dynamic of prediction market with behavioral traders
Dian Yu, Tongyao Wang, Jiajun Gao
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Proceedings Volume 12163, International Conference on Statistics, Applied Mathematics, and Computing Science (CSAMCS 2021); 121631W (2022) https://doi.org/10.1117/12.2627471
Event: International Conference on Statistics, Applied Mathematics, and Computing Science (CSAMCS 2021), 2021, Nanjing, China
Abstract
Over the past two decades, prediction market has become an increasingly important tool for both practical application and theoretical economic studies. Despite its outstanding predicting accuracy, little is known about the stationary properties of prediction market. In this work we build a dynamic trading model of prediction markets with the inclusion of behavioral traders. In our model, one single market maker is responsible for the issuance, trade and liquidation of a binary ArrowDebreu security; the utilities of behavioral traders are characterized by the prospect theory-based model. These utility functions assume a peculiar ‘S’ shape instead of the usual concave curvature. We prove that the individual trade between behavioral trader and the market maker is well-posed. Simulation to show the existence of these behavioral traders could result in price distortion.
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Dian Yu, Tongyao Wang, and Jiajun Gao "On the price dynamic of prediction market with behavioral traders", Proc. SPIE 12163, International Conference on Statistics, Applied Mathematics, and Computing Science (CSAMCS 2021), 121631W (22 April 2022); https://doi.org/10.1117/12.2627471
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KEYWORDS
Binary data
Analytical research
Modeling
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