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How Prediction Markets can Save Event Studies

Author

Listed:
  • Erik Snowberg
  • Justin Wolfers
  • Eric Zitzewitz
Abstract
This review paper articulates the relationship between prediction market data and event studies, with a special focus on applications in political economy. Event studies have been used to address a variety of political economy questions - from the economic effects of party control of government to the importance of complex rules in congressional committees. However, the results of event studies are notoriously sensitive to both choices made by researchers and external events. Specifically, event studies will generally produce different results depending on three interrelated things: which event window is chosen, the prior probability assigned to an event at the beginning of the event window, and the presence or absence of other events during the event window. In this paper we show how each of these may bias the results of event studies, and how prediction markets can mitigate these biases.

Suggested Citation

  • Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2011. "How Prediction Markets can Save Event Studies," CESifo Working Paper Series 3434, CESifo.
    • Handle: RePEc:ces:ceswps:_3434
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2013. "Prediction Markets for Economic Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 657-687, Elsevier.
    2. Quoc-Anh Do & Bang Dang Nguyen & Yen-Teik Lee & Kieu-Trang Nguyen, 2011. "Out of Sight, Out of Mind:The Value of Political Connections in Social Networks," Working Papers 19-2011, Singapore Management University, School of Economics.
    3. Quoc-Anh Do & Yen-Teik Lee & Bang Dang Nguyen, 2016. "Directors as Connectors: The Impact of the External Networks of Directors on Firms," Post-Print hal-03393196, HAL.
    4. repec:hal:spmain:info:hdl:2441/5q8d3q8agf8hdbs42laqdfujkb is not listed on IDEAS
    5. Niklas Potrafke, 2017. "Government Ideology and Economic Policy-Making in the United States," CESifo Working Paper Series 6444, CESifo.
    6. Niklas Potrafke, 2018. "Government ideology and economic policy-making in the United States—a survey," Public Choice, Springer, vol. 174(1), pages 145-207, January.
    7. Coulomb, Renaud & Sangnier, Marc, 2014. "The impact of political majorities on firm value: Do electoral promises or friendship connections matter?," Journal of Public Economics, Elsevier, vol. 115(C), pages 158-170.
    8. repec:hal:spmain:info:hdl:2441/7o52iohb7k6srk09n0dcia0po is not listed on IDEAS
    9. Bielen, David A. & Newell, Richard G. & Pizer, William A., 2018. "Who did the ethanol tax credit benefit? An event analysis of subsidy incidence," Journal of Public Economics, Elsevier, vol. 161(C), pages 1-14.
    10. Gökçe Göktepe & Shanker Satyanath, 2013. "The economic value of military connections in Turkey," Public Choice, Springer, vol. 155(3), pages 531-552, June.
    11. Dragan Ilić & Janick Christian Mollet, 2022. "Voluntary corporate climate initiatives and regulatory threat," International Economics and Economic Policy, Springer, vol. 19(1), pages 157-184, February.
    12. Borochin, Paul & Golec, Joseph, 2016. "Using options to measure the full value-effect of an event: Application to Obamacare," Journal of Financial Economics, Elsevier, vol. 120(1), pages 169-193.
    13. Coulomb, Renaud & Sangnier, Marc, 2014. "The impact of political majorities on firm value: Do electoral promises or friendship connections matter?," Journal of Public Economics, Elsevier, vol. 115(C), pages 158-170.
    14. Gabriel E Lade & C -Y Cynthia Lin Lawell & Aaron Smith, 2018. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(3), pages 707-731.
    15. Goodell, John W. & McGee, Richard J. & McGroarty, Frank, 2020. "Election uncertainty, economic policy uncertainty and financial market uncertainty: A prediction market analysis," Journal of Banking & Finance, Elsevier, vol. 110(C).
    16. Andr� Betzer & Markus Doumet & Ulf Rinne, 2013. "How policy changes affect shareholder wealth: the case of the Fukushima Dai-ichi nuclear disaster," Applied Economics Letters, Taylor & Francis Journals, vol. 20(8), pages 799-803, May.
    17. Quoc-Anh Do & Yen-Teik Lee & Bang Dang Nguyen, 2016. "Directors as Connectors: The Impact of the External Networks of Directors on Firms," SciencePo Working papers Main hal-03393196, HAL.
    18. Caprini, Giulia, 2023. "Does candidates’ media exposure affect vote shares? Evidence from Pope breaking news," Journal of Public Economics, Elsevier, vol. 220(C).
    19. repec:spo:wpmain:info:hdl:2441/7o52iohb7k6srk09n0dcia0po is not listed on IDEAS

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    More about this item

    Keywords

    prediction markets; event studies; political economy;
    All these keywords.

    JEL classification:

    • A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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