What Makes Markets Predict Well? Evidence from the Iowa Electronic Markets

Abstract

We use the data from the Iowa Electronic Markets to study factors associated with the ability of markets to predict future events. These are large-scale, real-money experimental markets with contract payoffs determined by political election outcomes. They provide data about individual trader characteristics and market micro-behavior which is not available from larger exchanges. In this study we find that market characteristics motivated by financial theory and previous experimental research account for most of the variance in predictive accuracy across sixteen markets. Three variables are particularly important: 1) the number of contract types traded, 2) pre-election market volumes and 3) differences in election eve (weighted) market bid and ask queues.