The role of monetary incentives in prediction markets: a time series approach

Prediction markets serve as popular devices to aggregate beliefs and to assess market estimated probabilities. By looking at the interaction between real- and play-money prediction markets, this paper shows that traded volume has a significant positive effect on the probability of real- and play-money market cointegration. This indicates that the information aggregation process, eliminating individual traders'' biases, operates even when not inducing truthful belief revelation with monetary incentives. The study is based on data from four markets covering the 2008 presidential election in the United States of America