Abstract: The paper is an exercise in creating a
market with the specific goal of aggregating
different pieces of private information held across a
population. Following a general history and
overview of current prediction markets, the paper
describes a dynamic pari-mutuel market model
designed to forecast UK-based terrorist attacks. We
explore the economic theory behind prediction
markets, drawing lessons and recommendations for
the proposed terrorism prediction market. Intramarket
sources of information are also examined,
and a Bayesian model to illustrate how traders
update their beliefs to incorporate new information
is detailed. Lastly, issues in contract design, how
contracts are traded, and the nature of participation
in this market are addressed.
