What Were the Odds? Estimating the Market's Probability of Uncertain Events / Ashley Langer, Derek Lemoine.

Format:

Book

Author/Creator:

Langer, Ashley.

Contributor:

National Bureau of Economic Research.

Lemoine, Derek.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28265.

NBER working paper series no. w28265

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

An event study generates only a lower bound on the full effect of an event unless researchers know the probability that investors assigned to the event before it occurred. We develop two model-free methods for recovering the market's priced-in probability of events. These methods require running event studies in financial options to complement the standard event study in stock prices. Validating both approaches, we estimate that the 2016 U.S. election outcome had a 12% chance of occurring. This probability is consistent with contemporary polling, bookmaker, and prediction market estimates. Demonstrating the usefulness of our approaches, we show that many OPEC meetings' outcomes were well-anticipated. OPEC retained substantial influence on world oil prices even as the U.S. increased oil production.

Notes:

Print version record

December 2020.