A Prediction Market for Toxic Assets Prices

TL;DR

This paper proposes a prediction market framework to forecast prices of toxic assets transferred from Irish banks to NAMA, aiming to improve transparency and aggregation of market opinions on asset valuations.

Contribution

It introduces a novel prediction market model for toxic asset pricing, integrating it with European Commission procedures for enhanced transparency and anomaly detection.

Findings

Prediction markets can effectively aggregate market opinions on asset prices.

The proposed model enhances transparency in toxic asset valuation.

Market prices reflect collective market sentiment on asset transfer values.

Abstract

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 for loans 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 represent transfer prices for toxic assets increases or decreases 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.