Alan Holland of UCC has a paper proposing a prediction market to forecast prices for “toxic assets” to be transferred from Irish banks to the National Asset Management Agency (NAMA).
Abstract below and the full paper is available here.
We propose the development of a prediction market for forecasting prices for ‘toxic assets’ to be transferred from Irish banks to the National Asset Management Agency (NAMA). Such a market allows market participants to assume a stake in a security whose value is tied to a future event. We propose that
securities are created whose value hinges on the transfer amount paid forloans from NAMA to a bank. In essence, bets are accepted on whether the price is higher or lower than a certain quoted figure. The prices of the securities indicate expected transfer costs for toxic assets and they increase or decrease in line with market opinion. Prediction markets offer a proven means of aggregating distributed knowledge pertaining to fair market values in a scalable and transparent manner. They are incentive compatible
(i.e. induce truthful reporting) and robust to strategic manipulation. We propose that a prediction market is run in parallel with the pricing procedure recommended by the European Commission. This procedure need not necessarily take heed of the prediction markets view in all cases but it may offer guidance and a means of anomaly detection. An online prediction market would offer everybody an opportunity to ‘have their say’ in an open and transparent manner.