Prediction Markets Update (September 10, 2008)

Today (for the first time in a long time), the McCain Intrade contract (2008.PRES.McCAIN) is essentially trading at parity with the Obama Intrade contract (2008.PRES.OBAMA); the last recorded prices for these contracts (at 5:12 p.m. Central time today) are 49.9 and 50 respectively. Yesterday, 2008.PRES.OBAMA closed at 52.4 and 2008.PRES.McCAIN closed at 47.4, and at the time the state-by-state contracts (see http://blog.garven.com/2008/09/09/forecast-of-the-2008-presidential-election-on-the-basis-of-state-by-state-prediction-market-contracts/) seemed to imply an electoral college advantage for Obama over McCain of 260-247, with Virginia (13 electoral college votes), Nevada (5 electoral college votes), Colorado (9 electoral college votes), and New Hampshire (4 electoral college votes) fitting into the “swing” state category by virtue of how close their prices were at the time.

Naturally, after seeing today’s price changes for 2008.PRES.McCAIN and 2008.PRES.OBAMA, I couldn’t help but wonder what might be going on with the .DEM and .REP versions of the Virginia, Nevada, Colorado, and New Hampshire state contracts. Today, VIRGINIA.REP and NEVADA.REP are more valuable than VIRGINIA.DEM and NEVADA.DEM respectively (55 and 55 versus 50 and 45 respectively), whereas COLORADO.DEM and NEWHAMPSHIRE.DEM are pricier than COLORADO.REP and NEWHAMPSHIRE.REP (52.2 and 57 versus 47.9 and 47 respectively (technical note: when added together, prices can exceed 100 because they are not necessarily synchronous)). If Virginia and Nevada went McCain’s way while Colorado and New Hampshire favored Obama, this would translate into a 273-265 win for Obama. Interestingly, this lines up very closely with today’s version of Nate Silver’s PECOTA model (see http://www.fivethirtyeight.com; as I understand it, the PECOTA model is not based upon prediction markets data and leans more toward some combination of state-by-state polling data, simulation, and econometrics), which currently predicts a 275-263 Obama victory.

There is a scenario in which the Electoral College ends up in a tie; this could happen if Virginia, Nevada, and New Hampshire went to McCain and Colorado went to Obama. If a tie occurs in the Electoral College, then the election is decided by the House of Representatives. Under this scenario, the most likely result would be an Obama presidency, since the Democratic Party currently controls the House of Representatives and the HOUSE.DEM.2008 contract (which pays 100 Intrade points in the event that the Democrats control the House of Representatives after 2008 Congressional Elections) currently indicates a 90 percent probability that this will continue to be the case after the general election on November 4.

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