E. Zitzewitz, "Price Discovery among the Punters: Using New Financial Betting Markets to Predict Intraday Volatility," (Working paper, Stanford University, July 2006).
Abstract: The migration of financial betting to prediction market exchanges in the last 5 years has facilitated the creation of contracts that do not correspond to a security traded on a traditional exchange. The most popular of these have been binary options on the closing value of Dow Jones Industrial Average (DJIA). Prices of these options imply expectations of volatility over the very short term, and they can be used to construct an index that has significant incremental predictive power, even after controlling for multiple lags of realized volatility and implied volatility from longer-term options. The index also has significant incremental power in predicting volatility over the next day, week, or month and in predicting trending or mean reversal in the level of the DJIA.
← G. Bakshi and L. Wu, "Investor Irrationality and the Nasdaq Bubble," (Paper presented at the meeting of the Western Finance Association, Keystone, Colorado, 22 June 2006).