The market as a whole also hedges against risk, and this affects asset prices. For example if there are two assets with equal expected returns but one is more correlated with the market return than the other, then the less correlated asset should have a higher price because it’s more useful for hedging. (See capital asset pricing model for details.) The upshot is that you can’t naively derive revealed beliefs without taking this into account. (And maybe introduce additional assets to your prediction market to figure out how correlated the participants believe the various bets are to the market return? There are probably papers about this but I’m too lazy to search for them.)
Intrade sells fed OMC rate binary options. I think if the market was more liquid, it would absolutely get used to hedge interest rate risks, and as people tend to be long bonds and short rates as a result, there might be a bias towards predicting higher rates as people want the protection. But the total holdings and the degree of hedging would be very opaque. Policy prediction markets could have similar problems.
The market as a whole also hedges against risk, and this affects asset prices. For example if there are two assets with equal expected returns but one is more correlated with the market return than the other, then the less correlated asset should have a higher price because it’s more useful for hedging. (See capital asset pricing model for details.) The upshot is that you can’t naively derive revealed beliefs without taking this into account. (And maybe introduce additional assets to your prediction market to figure out how correlated the participants believe the various bets are to the market return? There are probably papers about this but I’m too lazy to search for them.)
Intrade sells fed OMC rate binary options. I think if the market was more liquid, it would absolutely get used to hedge interest rate risks, and as people tend to be long bonds and short rates as a result, there might be a bias towards predicting higher rates as people want the protection. But the total holdings and the degree of hedging would be very opaque. Policy prediction markets could have similar problems.