Intrade.com maintains an actively traded market for futures contracts which pay 100 points (where 1 point = $.10) in the event that a specific contingent event occurs and 0 points otherwise. Thus, prices represent “risk neutral” event probabilities. I have previously blogged about how useful prediction markets can be in assessing political events such as election outcomes (e.g., see Prediction markets assessment of the (2004) Presidential Election and Preliminary assessment of the accuracy of the Intrade State-by-State contracts (for the 2008 Presidential Election)); furthermore, an article entitled “Prediction Markets“ by Justin Wolfers and Eric Zitzewitz, Journal of Economic Perspectives (Vol. 18, No. 2 (Spring 2004), pp. 107-126) provides a particularly informative technical survey concerning prediction markets in general.
Lately, the upcoming (January 19) United States Senate special election in Massachusetts has become particularly interesting because up until the past couple of weeks, the Democratic candidate (Martha Coakley) was heavily favored to defeat the Republican candidate (Scott Brown). Below, I list the time series graphs for the MA.SPEC.SENATE.DEM and the MA.SPEC.SENATE.REP contracts that are currently trading on intrade.com. The MA.SPEC.SENATE.DEM contract is a (100,0) bet on Martha Coakley winning this special election, whereas the MA.SPEC.SENATE.REP contract is a (100,0) bet on Scott Brown prevailing. Both contracts were initially offered on this exchange in September 2009, but only since the beginning of 2010 has there been much interest in trading these contracts.
Lately there has been strong momentum in Brown’s favor, and as I write this, the MA.SPEC.SENATE.REP contract is up 13 points from its previous (1/15) close of 41, whereas the MA.SPEC.SENATE.DEM contract is down 12.5 points from its previous close of 61 (note that that the contract prices can sum to slightly more or less than 100 because trades are non-synchronous). The price change since earlier this week has been quite dramatic, going from a roughly 80/20 advantage for Coakley to the present situation which indicates a slight advantage probabilistically for Brown. Anyway, it will be obviously very interesting to see how this election plays out!