Information aggregation in smooth markets

Krishnamurthy Iyer, Ramesh Johari, Ciamac C. Moallemi

Research output: Chapter in Book/Report/Conference proceedingConference contribution

14 Scopus citations


Recent years have seen extensive investigation of the information aggregation properties of prediction markets. However, relatively little is known about conditions under which a market will aggregate the private information of rational risk averse traders who optimize their portfolios over time; in particular, what features of a market encourage traders to ultimately reveal their private information through trades? We consider a market model involving finitely many informed risk-averse traders interacting with a market maker. Our main result identifies a basic asymptotic smoothness condition on the price in the market that ensures information will be aggregated under a portfolio convergence assumption. Asymptotic smoothness is fairly mild: it requires that, eventually, infinitesimal purchases or sales should see the same per unit price. Notably, we demonstrate that, under some mild conditions, cost function market makers (or, equivalently, market makers based on market scoring rules) satisfy the asymptotic smoothness requirement.

Original languageEnglish (US)
Title of host publicationEC'10 - Proceedings of the 2010 ACM Conference on Electronic Commerce
Number of pages7
StatePublished - 2010
Externally publishedYes
Event11th ACM Conference on Electronic Commerce, EC'10 - Cambridge, MA, United States
Duration: Jun 7 2010Jun 11 2010

Publication series

NameProceedings of the ACM Conference on Electronic Commerce


Conference11th ACM Conference on Electronic Commerce, EC'10
Country/TerritoryUnited States
CityCambridge, MA


  • dynamic games
  • information aggregation
  • prediction markets
  • risk aversion


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