Monthly Archives: October 2008

Prediction Markets

Prediction Markets Update (October 12, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 77.5, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 23.0 (compared with 77.2 and 23.9 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 353-174 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). At this point in time, Missouri (11 Electoral College votes) is the only “swing” state.

FiveThirtyEight.com currently gives Mr. Obama a 349.4 to 188.6 advantage over Mr. McCain.

Addendum: October 12, 2008 Electoral College Vote allocation

Barack Obama (353): 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), 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

Prediction Markets Update (October 11, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 77.2, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 23.9 (compared with 78 and 22.6 respectively as reported on yesterday’s update).

The state-by-state contracts now imply that Mr. Obama holds a 353-174 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Since yesterday, what’s changed is that Indiana (11 Electoral College votes) has moved back into McCain’s column, leaving Missouri (11 Electoral College votes) as the only swing state.

FiveThirtyEight.com currently gives Mr. Obama a 349.4 to 188.6 advantage over Mr. McCain.

Addendum: October 11, 2008 Electoral College Vote allocation

Barack Obama (353): 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), 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)

Financial Crisis

Frequency Diagram for the Implied Volatility Index, January 2, 1990 – October 10, 2008

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According to a Reuters article published yesterday (October 10; see “Wall Street’s fear gauge hits record highs“),

“An index regarded as Wall Street’s fear gauge notched record highs again on Friday, reflecting unprecedented investor anxiety after the broad U.S. stock market fell in a turbulent session. The Chicago Board Options Exchange Volatility Index, or the VIX, surged 20.4 percent to an all-time high at 76.94, before closing at 69.95.”

I made reference to the VIX in my comments at the “Understanding the Financial Crisis” panel discussion on Thursday (see pp. 12-13 of “Moral Hazard and Financial Hazard”). I also reference VIX in my blog entry entitled “Volatility“. Besides being the worst 1 week period in recorded history for the major stock market indices, last week was also marked by a daily progression of new all-time highs for the VIX. Here are the closing values for each trading day last week:

10/6/2008 52.05
10/7/2008 53.68
10/8/2008 57.53
10/9/2008 63.92
10/10/2008 69.95

Since January 2, 1990, there have been a total of 4,733 daily observations for VIX. The addition of only 5 data points last week actually marginally increased the average VIX, the VIX standard deviation, as well as the positive skewness and “fat-tailedness” of the entire data series. Friday’s closing value of 69.95 is 7.75 standard deviations to the right of the average of 19.23. If this were a normal distribution (it’s definitely not), the probability of such an extreme value would be 0.00000000000047%.

Here’s a frequency diagram for VIX during the period January 2, 1990 – October 10, 2008. (note that if you click on the graphic and look closer, the last four bars from 52 out to 70 represent the 5 closing values for VIX last week). Visually, you can see that this is a positively skewed distribution of outcomes (skewness is 1.128), and it is also fat-tailed (kurtosis is 5.22). For the normal distribution, skewness is 0 (the normal distribution is not skewed), and kurtosis is 3 (the normal distribution is not fat-tailed either). The joint effect of positive skewness and fat tails is that this means that the odds of extreme values (particularly to the upside) are higher than they would be for a normally distributed random variable. Suffice it to say, these are extremely rare events now matter how you look at them.

Prediction Markets

Prediction Markets Update (October 10, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 78, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 22.6 (compared with 76.6 and 23.4 respectively yesterday).

The state-by-state contracts now imply that Mr. Obama holds a 353-163 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Since my last update (on October 8), North Carolina (15 Electoral College votes) has swung over to the Obama column, whereas Indiana (11 Electoral College votes) and Missouri (11 Electoral College votes) have dropped out of the McCain column and moved into swing state status.

Addendum: October 10, 2008 Electoral College Vote allocation

Barack Obama (353): 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), 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)

Financial Crisis

Understanding the Financial Crisis: A Panel Discussion

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Tomorrow afternoon, I will take part in a panel discussion at Baylor University entitled “Understanding the Financial Crisis”. Here’s the official press release from Baylor’s Hankamer School of Business. The event will be recorded tomorrow and available for viewing on the web by by no later than Oct. 20, 2008.

Anyway, here’s the line-up:

Moderator: Dr. Mark Dunn, Professor of Marketing and Associate Dean, Hankamer School of Business

Panel:

  • Dr. James Garven, Frank S. Groner Memorial Chair of Finance and Professor of Finance & Insurance
    “Moral Hazard and Financial Hazard”
  • Dr. Kent Gilbreath, E.M. and Thelma Stevens Chair of Private Enterprise and Entrepreneurship and Professor of Economics
    “The Perfect Economic Storm”
  • Dr. William Reichenstein, Pat and Thomas R. Powers Chair of Investment Management and Professor of Finance
    “Investment Advice in Credit Crisis”
  • Dr. David VanHoose, Herman W. Lay Chair of Private Enterprise and Professor of Economics
Prediction Markets

Prediction Markets Update (October 8, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 73, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 27 (compared with 70.1 and 29.8 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 338-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). While North Carolina (15 Electoral College votes) remains the only state still “qualifying” as a swing state according to my criterion on contract pricing and the allocation of Electoral College votes, Indiana (11 Electoral College votes) and Missouri (11 Electoral College votes) are very close to dropping out of the McCain column and into swing state status (note that the last price for INDIANA.REP was 57, and for MISSOURI.REP it was 56, whereas INDIANA.DEM and MISSOURI.DEM last traded for 45 and 44 respectively).

FiveThirtyEight.com currently gives Mr. Obama a 346.8 to 191.2 advantage over Mr. McCain.

Addendum: October 8, 2008 Electoral College Vote allocation

Barack Obama (338): 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), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), 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)

Financial Crisis

Volatility

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Here’s a time series graph of the CBOE volatility index (VIX) from January 2, 1990 through October 8, 2008:


Today, the VIX today hit an all-time high of 57.64 (after hitting all time highs of 52.05 on Monday and 53.68 on Tuesday). Since the mean of this series is 19.21 (based upon a total of 4,730 daily closing prices dating back to January 2, 1990), and its standard deviation is 6.47, today’s VIX is 5.94 standard deviations to the right of the mean. Obviously this is a very fat-tailed distribution, but it is nevertheless (morbidly) entertaining to point out that if the series were normally distributed, then one would expect to observe this extreme of an outcome once every 683,138,010 days that the financial markets are open. The number of trading days varies from year to year depending on what day of the week holidays fall on, but a rough guess is 52 weeks x 5 days per week = 260 less about 10 holidays = 250 trading days. So if we translate this into the implied number of years, the odds of this happening would come out to roughly once every 683,138,010/250 = 2,732,552 years.

Financial Crisis

Will the US Economy Suffer a Depression?

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Intrade yesterday announced a new binary futures contract, which pays off 100 Intrade points ($10) if the US economy suffers a depression sometime during 2009, and 0 Intrade points ($0) if it doesn’t. “Depression” for purposes of this contract is defined as a total decline in GDP equal to or greater than 10%. See http://www.intrade.com/news/news_288.html for specifics on the contract rules. The ticker symbol for this contract is US.DEPRESSION.09. The “good” news is that so far, no trades have occurred; there is a bid price of 5, and an ask price of 15.

Perhaps the more meaningful contracts are the US.RECESSION.08 and US.RECESSION.09 contracts, which represent (100,0) bets that the US economy suffers a recession sometime during 2008 or 2009. Both contracts define recession as two successive quarters of negative real GDP growth. The last trade for US.RECESSION.08 occurred at 50 and at 80 for US.RECESSION.09, but compared with the political contracts, trading volume is quite low and bid-ask spreads are very wide, which implies these contracts are relatively illiquid. For example, for US.RECESSION.09, there currently are bid prices ranging from 10 to 75, and ask prices ranging from 80-99.9.

Prediction Markets

Prediction Markets Update (October 7, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 70.1, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 29.8 (compared with 69 and 31.4 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 338-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Only North Carolina (15 Electoral College votes) qualifies as a swing state according to my criterion on contract pricing and the allocation of Electoral College votes.

FiveThirtyEight.com currently gives Mr. Obama a 345.4 to 192.6 advantage over Mr. McCain.

Addendum: October 7, 2008 Electoral College Vote allocation

Barack Obama (338): 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), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), 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

Prediction Markets Update (October 6, 2008)

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The 2008.PRES.OBAMA Intrade contract now trades at 69, whereas the 2008.PRES.McCAIN Intrade contract is currently trading at 31.4 (compared with 64.2 and 35.0 respectively as reported on yesterday’s update).

The state-by-state contracts continue to imply that Mr. Obama holds a 338-185 “lead” over Mr. McCain (based upon my cutoff price point of 55 for allocating Electoral College votes). Florida (27 Electoral College votes) and Virginia (13 Electoral College Votes) are back in Mr. Obama’s corner, leaving only North Carolina (15 Electoral College votes) as a swing state.

FiveThirtyEight.com currently gives Mr. Obama a 339.7 to 198.3 advantage over Mr. McCain.

Addendum: October 6, 2008 Electoral College Vote allocation

Barack Obama (338): 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), Nevada (5), New Hampshire (4), New Jersey (15), New Mexico (5), New York (31), Ohio (20), Oregon (7), Pennsylvania (21), Rhode Island (4), Vermont (3), Virginia (13), Washington (11), and Wisconsin (10)

John McCain (185): Alabama (9), Alaska (3), Arizona (10), Arkansas (6), Georgia (15), Idaho (4), Indiana (11), Kansas (6), Kentucky (8), Louisiana (9), Mississippi (6), Missouri (11), 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)