Prediction Markets Update: October 30, 2008

The 2008.PRES.OBAMA Intrade contract now trades at 83.3, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 17.3 (compared with 87.2 and 13.3 respectively as as reported in my last update on October 28).

The state-by-state contracts continue to imply that Mr. Obama holds a 364-174 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes), with none of the 50 states or the District of Columbia falling into the “swing” state category.

FiveThirtyEight.com currently gives Mr. Obama a 344.1 to 193.9 advantage over Mr. McCain.

Addendum: October 30, 2008 Electoral College Vote allocation

Barack Obama (364): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Missouri (11), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (174): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets Update: October 28, 2008

The 2008.PRES.OBAMA Intrade contract now trades at 87.2, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 13.3 (compared with 88 and 12.8 respectively as as reported in my last update on October 26).

The state-by-state contracts now imply that Mr. Obama holds a 364-174 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes), with none of the 50 states or the District of Columbia falling into the “swing” state category.  Since my last update, Indiana (11 Electoral College votes) has moved from Mr. Obama’s column into Mr. McCain’s column.

FiveThirtyEight.com currently gives Mr. Obama a 348.2 to 189.8 advantage over Mr. McCain.

Addendum: October 28, 2008 Electoral College Vote allocation

Barack Obama (364): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Missouri (11), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (174): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets Update: October 26, 2008

The 2008.PRES.OBAMA Intrade contract now trades at 88, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 12.8 (compared with 86.9 and 13.4 respectively as as reported in my last update on October 25).

The state-by-state contracts continue to imply that Mr. Obama holds a 375-163 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes), with none of the 50 states or the District of Columbia falling into the “swing” state category.

FiveThirtyEight.com currently gives Mr. Obama a 351.2 to 186.8 advantage over Mr. McCain.

Addendum: October 26, 2008 Electoral College Vote allocation

Barack Obama (375): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Indiana (11), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Missouri (11), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (163): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets Update: October 25, 2008

The 2008.PRES.OBAMA Intrade contract now trades at 86.9, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 13.4 (compared with 87.1 and 13.8 respectively as as reported in my last update on October 23).

The state-by-state contracts imply that Mr. Obama holds a 375-163 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). None of the 50 states or the District of Columbia fall into the “swing” state category. Since my last update, Indiana has been nudged from swing state status into Mr. Obama’s column.

FiveThirtyEight.com currently gives Mr. Obama a 348.4 to 189.6 advantage over Mr. McCain.

Addendum: October 25, 2008 Electoral College Vote allocation

Barack Obama (375): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Indiana (11), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Missouri (11), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (163): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets Update: October 23, 2008

The 2008.PRES.OBAMA Intrade contract now trades at 87.1, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 13.8 (compared with 84.1 and 16.1 respectively as as reported in my last update on October 19).

The state-by-state contracts continue to imply that Mr. Obama holds a 364-163 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Mr. McCain’s point total is 11 lower now because Indiana (11 Electoral College votes) has moved out of his column and into “swing state” status.

FiveThirtyEight.com currently gives Mr. Obama a 344.3 to 193.7 advantage over Mr. McCain.

Addendum: October 23, 2008 Electoral College Vote allocation

Barack Obama (364): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Missouri (11), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (163): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets Update: October 19, 2008

The 2008.PRES.OBAMA Intrade contract now trades at 84.1, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 16.1 (compared with 83.6 and 16.1 respectively as as reported in yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 364-174 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Since there are no longer any state contracts that are trading in the 45-55 range, this means that As was the case yesterday, there currently are no “swing” states left (according to this pricing criterion, anyway).

FiveThirtyEight.com currently gives Mr. Obama a 343.9 to 194.1 advantage over Mr. McCain.

Addendum: October 19, 2008 Electoral College Vote allocation

Barack Obama (364): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Missouri (11), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (174): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Will the price of risk be too high or too low?

So asks George Mason University Professor Tyler Cowen. Professor Cowen also warns against “huff-and-puff polemic discussion” by policymakers which does not properly take into account the dynamics associated with recalibrating the price of risk. Unfortunately, huff-and-puff is probably the best that we can hope for out of Congress during the coming week.

Conference on Financial Innovation

Last week, I attended the Conference on Financial Innovation at Vanderbilt University. The purpose of this meeting was to commemorate the 35th anniversary of the publication of two of the most important and influential articles in finance: one by Fischer Black and Myron Scholes, and the other by Robert Merton, both on the theory of option pricing. Scholes and Merton were awarded the Nobel Prize in Economics in 1997 for these and other related research contributions (Fischer Black probably would have been so named had he been alive in 1997 but he passed away in 1995 and the Nobel is not posthumously awarded). Since the conference was given in the honor of Scholes and Merton, quite appropriately both men were present at this meeting.

Options are commonly referred to as “derivative” securities because their values derive from the values of other assets. For example, the Chicago Board Options Exchange (CBOE; coincidentally founded in the same year as these papers were published) makes a market in exchange-traded call and put options on individual stocks as well as on various equity market indices; e.g., S&P 500, DJIA, NASDAQ, etc. Before Black-Scholes and Merton, an important unresolved question in finance concerned how to price and manage risk, and Black-Scholes-Merton provides a remarkably robust framework within which to do just that.

Besides spawning substantial literatures concerning options theory and applications, these papers were also seminal in the sense that they also helped spawn a number of important financial market innovations. The conference sessions featured papers that either build upon or apply the Black-Scholes-Merton framework to the following set of “real world” topics: volatility markets (e.g., VIX), real estate markets, credit markets, index option markets, real options (which involves the application of options theory to corporate decision-making (e.g., the “optionality” of investing or divesting in a capital asset), and valuing managerial compensation contracts.

There was also a panel discussion that featured Merton, Scholes, and Leo Melamed. Not surprisingly, the panel discussion addressed the financial crisis in some depth. Merton picked up on the idea (originally floated by MIT’s Andrew Lo) of creating a “financial NTSB” for the purpose of having experts do some serious analysis of the financial crisis. The problem with political exercises such as the ones that are slated for this coming week is that Congressional hearings held on the eve of a general election are not likely to provide appropriate forums for serious analysis; rather, they are designed primarily to fulfill various political objectives. There is an historical precedent for a financial NTSB; in the aftermath of the 1987 crash, a presidential commission called the Brady Commission (named after Treasury Secretary Nicholas Brady) was formed for the purpose of studying the causes of the 1987 crash and recommending various market reforms which were designed to help restore investor confidence (although in retrospect, a strong subsequent performance by the economy may have been more important than the Brady commission reforms in terms of accomplishing this objective). All three panel members expressed concern about the risk of unintended consequences which may stem from a failure to fully grasp the nature and scope of the crisis. Merton commented that now more than ever, we need more innovation, not less. However, in the rush to “do something” about the problem, a substantial re-regulation of the financial sector could very well undermine incentives for innovation, which in turn could have the unintended consequence of impeding the resiliency and vitality of the financial sector going forward (thereby rendering it all the more vulnerable to future crises).

Prediction Markets Update (October 18, 2008)

The 2008.PRES.OBAMA Intrade contract now trades at 83.6, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 16.1 (compared with 77.5 and 23.0 respectively as reported on October 12, which was the the last time I posted an update on the Prediction Markets).

The state-by-state contracts imply that Mr. Obama holds a 364-174 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Since there are no longer any state contracts that are trading in the 45-55 range, this means that there currently are no “swing” states left (according to this pricing criterion, anyway). Missouri was previously a “swing” state, but the MISSOURI.DEM contract has rallied substantially and is currently trading at 66.9.

FiveThirtyEight.com currently gives Mr. Obama a 349.2 to 188.8 advantage over Mr. McCain.

Addendum: October 18, 2008 Electoral College Vote allocation

Barack Obama (364): California (55), Colorado (9), Connecticut (7), Delaware (3), District of Columbia (3), Florida (27), Hawaii (4), Illinois (21), Iowa (7), Maine (4), Maryland (10), Massachusetts (12), Michigan (17), Minnesota (10), Missouri (11), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), North Carolina (15), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (174): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Montana (3), Nebraska (5), North Dakota (3), Oklahoma (7), South Carolina (8), South Dakota (3), Tennessee (11), Texas (34), Utah (5), West Virginia (5), and Wyoming (3)

Prediction Markets Manipulation, now and in 2004

Yesterday, newly minted Nobel Laureate Paul Krugman pointed out in his New York Times article “Manipulating the future” that evidence had surfaced to the effect (for the 2008.PRES.OBAMA and 2008.PRES.McCAIN Intrade contracts anway) that

“… someone … was manipulating the Intrade presidential odds, trying to drive up the price of a McCain win and thereby influence political perceptions.”

This brings to mind a similar controversy during the 2004 election. As is documented here and here, an apparent manipulation effort took place in the Tradesports 2004 presidential markets. According to Donald Luskin’s account at the time,

“There have now been four separate “speculative attacks” on the market in futures contracts on Bush’s reelection probabilities… The attacks on the Bush futures have involved massive sell orders placed by a single individual — the same individual all four times — according to a spokesman for Tradesports.com, the Dublin-based futures-trading website. Each attack caused a massive temporary drop in the price of the Bush reelection futures. The most recent attack came last Friday at about 1:30 p.m. Eastern time. It whacked the Bush futures from a price of 54 (indicating the market’s estimate of a 54 percent probability of a Bush reelection) all the way down to 10 (indicating a 10 percent probability of reelection) in just eight minutes. Six minutes after the attack the Bush futures were back to 54. That’s the equivalent of an 8,000-point crash in the Dow Jones Industrial Average followed by an 8,000-point recovery. All within 14 minutes.”

I recall at the time thinking that I wished that I had opened a Tradesports account and put in a “limit” order to buy Bush at 10 :-). More seriously, what impressed me about the incident is how quickly the prediction market price recovered. I highly recommend Alex Tabarrok’s posting from earlier today entitled “Manipulation of Prediction Markets” for more information about this topic.