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SIGECOM
2010
ACM

Information aggregation in smooth markets

13 years 8 months ago
Information aggregation in smooth markets
Recent years have seen extensive investigation of the information aggregation properties of prediction markets. However, relatively little is known about conditions under which a market will aggregate the private information of rational risk averse traders who optimize their portfolios over time. We consider a market model involving finitely many informed risk-averse traders interacting with a market maker. Our main result identifies a basic smoothness condition on the price in the market that ensures information will be aggregated. We give conditions under which cost function market makers (or, equivalently, market makers based on market scoring rules) satisfy the smoothness requirement. We further show that regardless of the level of risk aversion of the traders, the final allocation and prices together constitute a competitive equilibrium; thus, in particular, the final portfolios of the traders are ex post Pareto efficient.
Krishnamurthy Iyer, Ramesh Johari, Ciamac Cyrus Mo
Added 18 Jul 2010
Updated 18 Jul 2010
Type Conference
Year 2010
Where SIGECOM
Authors Krishnamurthy Iyer, Ramesh Johari, Ciamac Cyrus Moallemi
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