Академический Документы
Профессиональный Документы
Культура Документы
Georgios G. Tziralis
presented in partial fulllment of the requirements for the degree of Doctor of Philosophy, in the Sector of Industrial Management and Operational Research, School of Mechanical Engineering, National Technical University of Athens Athens, 21 June 2013
0. Contents
I. Introduction II. Background III. Theoretical Properties IV. Theoretical Evaluation V. Empirical Analysis VI. Advanced Concepts VII. Conclusions
I. Introduction
I.I Scope
What men have seen they know; but what shall come hereafter, no man before the event can see. Sophocles Ajax, Chorus, lines 1417-1419, ca 450-440 BC
Forecasting, a task of aggregation, ltering and processing: a) ideally, collect all potentially related information, then b) lter only the relevant to the target variable parts & c) process the remaining data to arrive at conclusions.
I.2a Approaches
Three core approaches to forecasting: 1. Causal methods 2. Time-series methods 3. Judgmental methods
I.3a Motivation
traditional approaches seem to have reached a ceiling any alternative mechanisms that organically perform
the core forecasting tasks in dynamic environments?
I.3b Motivation
human intelligence seems to excel at most parts of
the forecasting problem biases
yet, it remains hindered by endemic problems, such as how could one take advantage of the virtues of
collective human intelligence and at the same time cancel out its limitations?
II. Background
Why & how do prediction markets work? What are their fundamentals of operation? What is their evolution in recent years? What is the existing volume of publications? Which are the topics covered by literature?
II.1a Markets
the best available mechanism for gathering and
aggregating dispersed information from agents
II.1b Markets
Financial markets are institutions that incorporate by their very nature and facilitate, in one way or another, all four fundamental functions of investment, hedging, speculation and information aggregation. Primary function investment hedging speculation information aggregation Market institution stock market futures market wagering market ?
Prediction markets are dened as markets designed and run for the primary purpose of mining and aggregating information scattered among traders; then transforming such information into market prices serving as predictions about specic future events.
a mechanism with an accuracy that can be assessed largely an empirical (or social) science
resulted in identifying 155 articles, increasing trend a comprehensive basis for understanding prediction
market research and its state of the art
II.4a Classication
II.4b Classication
a promising forecasting approach and largely
untouched research eld
1. Market mechanisms 2. Prediction markets mechanisms 3. Properties for a coherent price function 4. A coherent price function I 5. A coherent price function II
What market mechanisms are used in general? What prediction market mechanisms are used? Which are the properties for a coherent (proper)
price function of a prediction market?
1. Continuous double auction (i.e. stock markets) 2. Market-maker (i.e. wagering with bookmaker) 3. Pari-mutuel (i.e. horse racing)
any case that pbid ! pask results into a transaction for any transaction to occur, there must be a
in the case that the highest bid price is less than the
lowest ask, nothing happens
in most cases CDAwMM an agent who is nearly always ready to trade in the bookmaker case, the market institution sets the
odds only for other players to buy and not to sell money
III.1d Pari-mutuel
people place wagers on which of two or more
wagered on it split the total amount invested
when the true outcome becomes known, players who the cost of purchasing an equal share of the prots
remains constant, unconditional to when the wager was placed
s is proper if ri=pi, namely the agent reports her true example of proper scoring rule (logarithmic):
The market maker sets initial expectations (e.g. all Each new trader agrees to compensate the previous
trader according to her previously submitted probability estimate
all money invested get redistributed to owners of the price function may vary according to properties
required
III.2f Adequacy
Market institution risk MSR DPM limited no Innite liquidity no yes Direction of liquidity buy/sell buy Current information capture yes yes
both mechanisms adequate, only minor issues MSR pays a xed monetary unit per share DPM pays per share an equal portion of the total
their satisfaction will provide for a coherent DPM no such framework existed, a contribution no already suggested functions satisfy it
all properties satised in a sense, a "unication" of DPM & MSR, via the
proposed price function
Does a proper prediction market work in theory? Will a proper prediction market converge to a
consensus equilibrium?
If yes, how fast is the convergence process? What is the best possible equilibrium? Will a proper prediction market always converge?
Traders information space: X={0,1}n (n traders) initially, each trader is privy to one bit of information
xi (input bit)
Price function: pk=exp(qk)/(exp(qk)+exp(ql)), where q Pay-off: all money redistributed to the winning
security (if f(s)=1 to security k, and vice versa)
equilibrium, where all market traders directly reveal their private information to each other
IV.3 Discussion
the model described stands as an abstract departure
from reality, difcult to replicate in practice
V. Empirical Analysis
Is a proper prediction market able to converge to What is a practical framework for prediction markets
V.Ia Context
moving from theory to practice, largely a social
science
no denite results, indications instead of proofs alternative approach to equilibrium in real world experimental results are assessed on this basis
settings: market converges (early enough & in a 'stable' way) to the correct outcome (market accuracy)
a state of the art tool for the creation, participation it was utilized in a series of cases, a number of which
V.2a Experiment A
academic context, testing information aggregation
capacities
topic: Athens 2004 impact study, all data available but students also answered to a survey on the same
topic, before participating in the market
V.2b Experiment A
V.2c Experiment A
>100 students, >200 markets, >4k play-money
transactions in less than a month
markets beat the survey, with a 0,33 vs 0,23 avg error every single market converged to the correct
outcome
V.3a Experiment B
business context, testing predictive capacities facilitated in a Greek, publicly traded, automotive
company
V.3b Experiment B
V.3c Experiment B
6 month long, 265 employees registered, only 32 made
at least 1 transaction, 664 play-money transactions in total
sufcient acceptance and utilisation of the tool results were sufciently close to the desirable
outcome
V.4a Experiment C
social context, testing predictive capacities hosted in a popular news portal, themed under
forthcoming Greek elections
V.4b Experiment C
V.4c Experiment C
45 random traders, 706 play-money transactions 14 markets, 7 with sufcient trading volume that were
further analysed
a few experiments cannot lead to universal principles that said, they sufce to provide a practical guide
instead
V.5b Design
the constituents of a prediction market are essentially
two: its stocks and traders, along with the mechanism that brings them together
V.5c Stocks
focus on the right choice and clear denition of a
forecasting goal
short, clear and easily understood stock description small number of stocks (i.e. less than 4 or 5) is
suggested
V.5d Participants
the tasks essentially are to a) nd those who possess
or are capable to discover relevant information and b) incentivize and engage them to so do
V.5e Discussion
developed a state-of-the-art, prediction markets
platform from scratch participation
ran a diverse set of experiments, with sufcient all experiments suggested that the proposed
mechanism is capable to perform the tasks at hand
1. Background 2. Time Series Analysis 3.Volatility Modeling 4. Experimental Settings 5. Experimental Results
What is a model of volatility for prediction markets? How can such a model serve to detect events? Does such a model work in practice?
VI.1a Background
event detection: the task of monitoring news corpus requires as input a meta-mechanism that aggregates
information from news corpus by nature
there exists a proven -yet unidentied- relationship relatively virgin research eld; prediction markets
maybe a t
between the release of relevant news stories and the uctuation of prices
VI.1b Background
various attempts to correlate simple changes in
initially experimented with machine learning satisfactory error metrics at rst sight, however
predictions were reproducing past prices, approach abandoned
then, a GARCH(1,1) model was demonstrated and evidence for volatility clustering was also provided
actual volatility prices are also retroactively known diff between predicted and actual volatility can nally
be computed
276 instances of high divergence between predicted number of occurrences of relevant for each contract important volatility signals versus important news
occurrences were eventually identied keywords were tracked via Google News Archive, for a period of 3 days before up to 3 days after each instance
average instance suggests a decreasing rate of relevant it was followed by a smaller but growing increase of no clear and signicant enough trend revealed however, the proposed approach essentially
contributed the ability to highlight such phenomena, with a signicantly improved condence rate
VII.1 Conclusions
I. Introduction Forecasting is far from a solved problem, and cannot be but so II. Background Markets emerge as an interesting approach to forecasting, extended literature review III. Theoretical Properties a coherent set of properties and a function satisfying them was contributed IV. Theoretical Evaluation theoretically and abstractedly, the proposed mechanism can work V. Empirical Analysis a set of real world experiments highlight the mechanism's adequacy
It regressed towards a simpler, transparent and more Prediction markets were studied in depth and width,
from literature to theory to experiments to practice literature, only future will tell
thank you
Georgios G. Tziralis