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Home / Proceedings / Proceedings of the AAAI Conference on Artificial Intelligence, 29 / No.1: The Twenty-Ninth Conference on Artificial Intelligence

Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker

March 8, 2023

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Authors

Mithun Chakraborty

Washington University in St. Louis


Sanmay Das

Washington University in St. Louis


Justin Peabody

Washington University in St. Louis


DOI:

10.1609/aaai.v29i1.9313


Abstract:

The logarithmic market scoring rule (LMSR), the most common automated market making rule for prediction markets, is typically studied in the framework of dealer markets, where the market maker takes one side of every transaction. The continuous double auction (CDA) is a much more widely used microstructure for general financial markets in practice. In this paper, we study the properties of CDA prediction markets with zero-intelligence traders in which an LMSR-style market maker participates actively. We extend an existing idea of Robin Hanson for integrating LMSR with limit order books in order to provide a new, self-contained market making algorithm that does not need “special” access to the order book and can participate as another trader. We find that, as expected, the presence of the market maker leads to generally lower bid-ask spreads and higher trader surplus (or price improvement), but, surprisingly, does not necessarily improve price discovery and market efficiency; this latter effect is more pronounced when there is higher variability in trader beliefs.

Topics: AAAI

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HOW TO CITE:

Mithun Chakraborty|| Sanmay Das|| Justin Peabody Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker Proceedings of the AAAI Conference on Artificial Intelligence, 29 (2015) .

Mithun Chakraborty|| Sanmay Das|| Justin Peabody Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker AAAI 2015, .

Mithun Chakraborty|| Sanmay Das|| Justin Peabody (2015). Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker. Proceedings of the AAAI Conference on Artificial Intelligence, 29, .

Mithun Chakraborty|| Sanmay Das|| Justin Peabody. Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker. Proceedings of the AAAI Conference on Artificial Intelligence, 29 2015 p..

Mithun Chakraborty|| Sanmay Das|| Justin Peabody. 2015. Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker. "Proceedings of the AAAI Conference on Artificial Intelligence, 29". .

Mithun Chakraborty|| Sanmay Das|| Justin Peabody. (2015) "Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker", Proceedings of the AAAI Conference on Artificial Intelligence, 29, p.

Mithun Chakraborty|| Sanmay Das|| Justin Peabody, "Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker", AAAI, p., 2015.

Mithun Chakraborty|| Sanmay Das|| Justin Peabody. "Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker". Proceedings of the AAAI Conference on Artificial Intelligence, 29, 2015, p..

Mithun Chakraborty|| Sanmay Das|| Justin Peabody. "Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker". Proceedings of the AAAI Conference on Artificial Intelligence, 29, (2015): .

Mithun Chakraborty|| Sanmay Das|| Justin Peabody. Price Evolution in a Continuous Double Auction Prediction Market With a Scoring-Rule Based Market Maker. AAAI[Internet]. 2015[cited 2023]; .


ISSN: 2374-3468


Published by AAAI Press, Palo Alto, California USA
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