Paper on Comparison of Market Maker Mechanisms

[Bernd Skiera]

Dear all,

 

I would kindly like to draw your attention to a paper that compares market maker mechanisms that recently appeared in IEEE Transactions on Engineering Management:

 

Slamka, Christian / Skiera, Bernd / Spann, Martin (2013), "Prediction Market Performance and Market Liquidity: A Comparison of Automated Market Makers", IEEE Transactions on Engineering Management, Vol. 60, Issue 1, 169-185

 

The abstract is:

 

The use of prediction markets (PMs) for forecasting is emerging in many fields because of its excellent forecasting accuracy. However, PM accuracy depends on its market design, including the choice of market mechanism. Standard financial market mechanisms are not well suited for small, usually illiquid PMs. To avoid liquidity problems, automated market makers (AMMs) always offer buy and sell prices. However, there is limited research that measures the relative performance of AMMs. This article examines the properties of four documented and applied AMMs and compares their performance in a large-scale simulation study. The results show that logarithmic scoring rules and the dynamic pari-mutuel market attain the highest forecasting accuracy, good robustness against parameter misspecification, the ability to incorporate new information into prices, and the lowest losses for market operators. However, they are less robust in case of noisy trading, which makes them less appropriate in environments with high uncertainty about true prices for shares.

 

Please send me an email if you would like to receive a copy of the paper.

 

Kind regards

 

Bernd Skiera

 

Bernd Skiera, Professor of Electronic Commerce, Department of Marketing, Faculty of Business and Economics, University of Frankfurt, Grueneburgplatz 1, 60323 Frankfurt, Germany, Phone.: +49-69-798-34649, Fax: +49-69-798-35001, E-Mail: ski...@wiwi.uni-frankfurt.de, http://www.ecommerce.wiwi.uni-frankfurt.de, http://www.facebook.com/Prof.Dr.Bernd.Skiera