A0740
Title: Option prices and risk-corrected probabilities of a binary event
Authors: Yujing Gong - London School of Economics (United Kingdom) [presenting]
Arie Gozluklu - Warwick Business School (United Kingdom)
Alex Ferreira - Universidade de Sao Paulo (Brazil)
Abstract: Risk-neutral probabilities of the Brexit referendum are estimated using data from both the options and prediction markets. We also provide a risk-corrected measure of these probabilities using both parametric and non-parametric methods. We find evidence that prediction markets reflected the average opinion of the FX options market using reasonable assumptions about preferences and the relative wealth paths in these two states of the world. However, our probabilities are well below the average intention to vote leave from Internet Poll data, which is itself an imperfect measure of the physical probability. By comparing the intention to vote with our estimated probabilities, given the knowledge of the actual outcome, our results show that FX and prediction markets seem to have substantially underestimated the likelihood of Brexit.
