Do Prediction Markets Predict Macroeconomic Risk?

The U.S. (and world too) economy is currently entering a recession. Right now, everybody can see it, the only question is how deep it will be. But is it possible in a real-time predict if the economy will go into a recession? And will that information help us to better set % allocation of equities in our portfolio? Most of the macroeconomic data shows recession in macroeconomic reports with a significant lag. There are multiple different forecasting models which we tries to predict recession or at least estimate the probability that we are entering into one. We are presenting one interesting research paper written by Jonathan Hartley which shows that prediction markets (betting markets created for the purpose of trading the outcome of events) can be successfully used as a complementary tool in various economic forecasting tools. Prediction markets can be used to measure risk in U.S. equities, credit spreads, the U.S. Treasury yield curve, and U.S. dollar foreign exchange rates. — The Encyclopedia of Quantitative and Algorithmic Trading Strategies