Prediction Markets Update on 2010 US Congressional Control

I have blogged extensively over the years concerning how reliable the so-called “prediction markets”; e.g., intrade.com, Iowa Electronic Markets (IEM) are in assessing political outcomes,  particularly when compared with traditional surveys conducted by various media companies.  Examples include prediction market assessments of presidential elections (e.g., see Prediction markets assessment of the Presidential Election from October 26, 2004 and Preliminary assessment of the accuracy of the Intrade State-by-State contracts from November 5, 2008), Supreme Court confirmations (e.g., see SC.CONFIRM.ALITO from November 6, 2005), as well as other kinds of contingent events such as the state of the economy (e.g., see What are the prediction markets saying about the economy? from April 10, 2009), etc. 

Both intrade.com and IEM maintain actively traded markets pertaining to the question of which party will control Congress (both House and Senate) after the 2010 midterm election which will be held on Tuesday, November 2, 2010.  The intrade.com market offers 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.

As of the market close on August 2, 2010, the Intrade market put the odds that the GOP will control the US House of Representatives after the midterm election at 59.9%.  The ticker symbol for the contract upon which this probability is based is HOUSE.REP.2010.  This contract began trading on September 5, 2008; the lowest recorded price was 15 (around the time of President Obama’s inauguration in January 2009), and the highest recorded price was yesterday’s closing price of 59.9.  Here’s a picture of the time series price behavior of HOUSE.REP.2010 contract since inception:

Like the HOUSE.REP.2010 contract, HOUSE.DEM.2010 contract began trading on September 5, 2008; not surprisingly, the lowest closing price occurred yesterday (43), and the highest price recorded was 90 (around the time of President Obama’s inauguration in January 2009). Here’s a picture of the time series price behavior of the HOUSE.DEM.2010 contract since inception:

Not surprisingly, the HOUSE.REP.2010 and HOUSE.DEM.2010 price series correlate very strongly with % Disapprove / % Approve numbers from the Gallup Daily Tracking Poll on Obama Job Approval (source: http://bit.ly/lS4ZF):

Obama_job_approval

There are also SENATE.REP.2010 and SENATE.DEM.2010 contracts which assess the odds of Republican versus Democratic control of the Senate after the midterm election; given the fact that only 1/3 of the Senate turns over ever two years, it is not surprising, given the size of the current Democratic majority in the senate, that the SENATE.REP.2010 last traded today at only 17 and the SENATE.DEM.2010 traded at 73.  However, it is interesting that the SENATE.NEITHER.2010 contract (which pays off 100 intrade points if neither party has a majority in the Senate after the midterm election) last traded at 11.6.  There are also Senate contracts that assess the odds of how many seats the GOP will have in the wake of the midterm election; the market’s current assessment is that the odds that the GOP will have 47 or more seats is 62%.  The takeaway from these data points is that while the Democrats will hold the Senate, their majority will be substantially weakened.

For more information concerning the topic of “prediction markets”, I recommend an article entitled “Prediction Markets“ by Justin Wolfers and Eric Zitzewitz that appeared a few years ago in Journal of Economic Perspectives (Vol. 18, No. 2 (Spring 2004), pp. 107-126).

Print Friendly

Leave a Reply