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Modelling Information Incorporation in Markets, with Application to Detecting and Explaining Events

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  • David M Pennock
  • Sandip Debnath
  • Eric Glover
  • C. Lee Giles

Abstract

We develop a model of how information flows into a market, and derive algorithms for automatically detecting and explaining relevant events. We analyze data from twenty-two "political stock markets" (i.e., betting markets on political outcomes) on the Iowa Electronic Market (IEM). We prove that, under certain efficiency assumptions, prices in such betting markets will on average approach the correct outcomes over time, and show that IEM data conforms closely to the theory. We present a simple model of a betting market where information is revealed over time, and show a qualitative correspondence between the model and real market data. We also present an algorithm for automatically detecting significant events and generating semantic explanations of their origin. The algorithm operates by discovering significant changes in vocabulary on online news sources (using expected entropy loss) that align with major price spikes in related betting markets.

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  • David M Pennock & Sandip Debnath & Eric Glover & C. Lee Giles, 2012. "Modelling Information Incorporation in Markets, with Application to Detecting and Explaining Events," Papers 1301.0594, arXiv.org.
    • Handle: RePEc:arx:papers:1301.0594
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    5. Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September.
    6. Forsythe, Robert & Forrest Nelson & George R. Neumann & Jack Wright, 1992. "Anatomy of an Experimental Political Stock Market," American Economic Review, American Economic Association, vol. 82(5), pages 1142-1161, December.
    7. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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