You searched for:
Iowa Electronic Markets
Here’s bit of bad news for my American Democrat friends; your candidate is dying on his arse in the Iowa Electronic Markets at the moment.
Here’s another bit of bad news; even at these prices, he’s still overvalued.
Note to readers. There is quite a lot of financial jargon in this post, because I’m dealing with quite a few issues that are only of interest to finance bods (and only marginally to them). The interesting stuff is toward the end.
I’m working on a piece on the Iowa Electronic Markets in my copious spare time at the moment. Just as a warm-up, here’s a few questions for finance mavens.
1. In the 1996 Presidential vote-share market, after the candidates have been nominated and adopted, what should the sum of the values of the CL|DOLE(Clinton vote share given Dole as opponent) plus V.DOLE (Dole vote share) contracts be?
2. What percentage return would you have made in the 2000 winner-takes-all market by buying the BUSH contract at the point when DEM was at its peak and holding to maturity?
3. You hold a porfolio in the current 2004 Presidential vote-share market long BU|KERR but short BU|CLINT. If George Bush were to announce tomorrow that he had decided to withdraw from the race, what would be your profit or loss?
Answers below the fold. Historical price and prospectus data available on the IEM website.
Currently “Tradesports”:http://www.tradesports.com/ has Bush at about a 56% chance to win the Presidency. But the “Iowa Electronic Markets”:http://128.255.244.60/quotes/78.html shows a slight lean towards a Kerry victory.
To be sure, the IEM tracks overall votes and Tradesports electoral votes, so these leanings could be consistent. And if Kerry wins the popular vote and loses outright they will be. But that looks rather unlikely. Kerry’s national vote has trailed his battleground states vote in just about every poll that’s looked at this split. This is not particularly surprising since the Bush campaign and its surrogates have massively overspent the Kerry campaign (and its surrogates) on _national_ advertising with Kerry focusing almost exclusively on battleground state advertising.
The IEM numbers are fairly close, but if they hold I suspect one or other (or quite likely both) markets will end up on the wrong side of this election. On the other hand, if Kerry does repeat Al Gore’s efforts and win the popular vote without taking over the White House, I might have to revise my faith in the success of these markets. (Of course if that happens I’ll have much more to worry about than being wrong on a technical question like this one.)
Thank you from the bottom of my heart to the traders on the Iowa Electronic Markets, who, on the last day of the campaign, have bid Kerry up to 51% chance of winning. Thus ensuring that, whoever wins, I will have ample material to spend the next four years teasing James Surowiecki about the “Wisdom of Panicky Crowds”.
(the really interesting thing is that the single most probable IEM outcome is still Bush to win with less than 52% of the popular vote. The big move of the bids has been from Bush>52 to Kerry >52!)
About two hours after the Osama video hit the newswires, and the good old Iowa Electronic Markets have marked down the two DEM04 contracts from about 48% to 44%. Ouch.
By the way, there might be a small prize for the first CT reader to find an online use of the “see, Kerry agrees with Bin Laden” talking point that is no doubt being lined up on the Mighty Wurlitzer …
Via the Marginal Revolution lads, here’s a working paper by Charles Manski, an economist at Northwestern who’s interested in a question that we’ve often returned to at CT; what are the prices in markets like the Iowa Electronic Markets (***MARKET UPDATE*** Kerry still “dying on arse”) actually measuring? Can we really take a market price of 0.70 and unproblematically read off it that “the market thinks there is a 70% chance”?
By way of a break from everything about the US elections in the blogosphere, here’s a post about the US elections.
As a spin-off from Daniel’s discussion of “whether the DEM04 contract is overvalued”:https://www.crookedtimber.org/archives/002460.html on the “Iowa Electronic Markets”:http://128.255.244.60/graphs/graph_Pres04_WTA.cfm, here’s a version of the trend surface he calculated that shows “differences between the Black-Scholes valuation and the observed market price”:http://www.kieranhealy.org/files/misc/dem04.pdf over time (you can look at it in smaller “PNG”:http://www.kieranhealy.org/files/misc/dem04.png format or better-quality “PDF”:http://www.kieranhealy.org/files/misc/dem04.pdf). I created it using “R”:http://www.r-project.org/, the free[1] statistics package because I “didn’t like Excel’s default effort”:https://www.crookedtimber.org/archives/kerrychart2/surface.JPG and I hadn’t had a reason to use R’s wireframe() function before. It’s still not up to the standards of the “Bill Clevelands”:http://cm.bell-labs.com/cm/ms/departments/sia/wsc/ or “Ed Tuftes”:http://www.edwardtufte.com/ of this world, but it was the best I could manage on short notice. Thanks to Daniel for sending me the data, and remember that whereas I am happy to field questions about graph colors and chart widgets, technical queries about option valuation, Black-Scholes volatility fluctuations and arbitrage should still be directed to him.
fn1. As in “free to make your own mistakes.”
Finally, with the Google IPO pricing way below expectations and with a serious arbitrage[1] showing up on the Iowa Electronic Markets, I get round to reviewing James Surowiecki’s “The Wisdom of Crowds”. I’ll save the suspense; it’s a cracking read and well worth buying. To give you an idea of the style, I’ll start this review with my own shockingly unfair parody …
You haven’t seen it reported elsewhere, but on the Iowa Electronic Markets”, Kerry overtook Bush a couple of days ago. I don’t know if this is a “convention pop”; needless to say it would be pretty bad news for market efficiency if it were. In related news, the Kerry vote-share contract I bought a while ago is now back into profit, and I am still long. If/when I can be bothered reproducing the files, I will update my system’s equity curve – to be honest it doesn’t look that great, although one might argue that the system did the right thing in keeping me long.
We’ve had more than a few things to say about the Iowa Electronic Markets over the life of Crooked Timber. In particular, John and myself have defended the view that these markets do not appear to offer marginal information above and beyond published opinion polls.
Some would say that this is fighting talk, and that if we really thought this, we ought to be trying to make some money out of it. So here goes …
Big thanks to Nasi Lemak for sharing a dataset of historical poll data with me. I have used that data to construct and backtest a trading system for the IEM Kerry vote-share contract (KERR) which uses only published poll data and generates favourable backtesting over the last four months. The equity curve for this system so far is below the fold; I plan to use it to trade the IEM vote-share market over the rest of the campaign.
[I’ve moved the picture below the fold to save bandwidth]
Can we no longer hear about the “predictive power” of the Iowa Electronic Markets, please? They were bamboozled to exactly the same degree as the rest of us.
[UPDATE]: A couple of people in comments have pointed out that this market is for the nomination, not the Iowa Caucus itself. Fair point, but sadly, no. Either the Iowa Caucus is an important determinant of who gets the nomination, or it isn’t. If it isn’t, there shouldn’t have been anything like this sharp movement on the 19th. If it is important, then trading in these contracts ought to have reflected relative chances of winning in Iowa. Either way, big spikes like this on news days are not consistent with semistrong market efficiency. I’d also note that the Iowa Electronic Markets are strongly linked with Iowa University’s business school, so the Iowa caucus is their best chance of having local tacit knowledge. While we’re noting things, I’d make a few points on the alternative prediction methods. The Irish Independent’s online poll seems to have done at least as well as IEM if not a little better (fair enough, I don’t have a time series for this one), and BBC Newsnight ran a big feature on Kerry last week; they’d clearly picked up the buzz.
The idea that speculative markets can be used to forecast political events hit the headlines a while ago with the furore over terrorism futures. This idea is still around and the general claim that political events can be forecast by futures or betting markets is still being pushed hard. The main source of data is at the Iowa Electronic Markets, but there’s plenty more. Reader Jack Strocchi sent me this report on a study of Australian betting markets and elections.
As it happens, I’d already looked at this and come fairly rapidly to the conclusion that the betting markets weren’t much good, so I was struck by the money quote from author Justin Wolfers
The data suggests the Australian betting market is extraordinarily efficient. And why not? There’s a huge incentive for participants to do their homework, collect reliable information and make sure the price is right.”
Looking at the report and also the Iowa studies, the evidence in support of this claim still seems very weak to me. In 2001, for example,
The night before the election, Howard [the incumbent Liberal PM] was ahead in two of three major polls ….[on Centrebet] Howard was the favorite with odds of $1.55, suggesting a 64 percent probability of his winning the election,”
That is, on the crudest possible use of the polls, two out of three suggested a Howard win, giving odds almost identical to Centrebet. In fact, I doubt that any serious analyst would have given the Labor Opposition even a 25 per cent chance by election night.
We’ve been consciously trying to dial down the amount of horse-race coverage of the US presidential nominations (it will probably inevitably get intolerable during the actual race, but that’s the policy), but I don’t think that no coverage at all is the aim. And one thing looks quite interesting to me at the moment; although the general buzz of the news cycle has Hillary Clinton level-pegging or even regaining “momentum”, the Electronic Markets have her, post a small Texas/Ohio bounce, still way out of the money with Obama looking like the favourite at around 75.
As far as I can tell, the tracking polls are telling more or less the same story at present. As far as I can see, the punditosphere seems to have got rather ahead of the data here; there’s a potential test of whether they have any actual predictive ability.
Always nice to be able to test an idea in a live application … It’s worthwhile remembering in any discussion of “terrorism futures” that nobody was ever really proposing to offer contracts on any specific terrorist events; the proposed “Policy Analysis Market” (which claims on its website that it’s going to launch in March; sadly there is no currently existing futures market which allows me to bet that it won’t), was always going to be about betting on general indices of global political stability. For example, one might think it would be useful to have a futures market which gave finer-grained information about the risks to the US than the Department of Homeland Security’s Threat Level Indicator; not just whether today’s threat was “yellow” or “orange”, but whether the risk was growing or falling.
One might think that, but one would be wrong. In actual fact, it is possible to trade futures on the US Homeland Security indicator at Tradesports.com. So, since the threat level was raised from “Yellow” to “Orange” over the weekend we can go to the tape and see whether the traders there had any advance steer on this movement. Did they?