In recent years, Texas has had one of the most dysfunctional homeowners insurance markets in the United States. To a large extent, this can be attributed to the combination of increased costs from mold claims coupled with various regulatory constraints. At the worst point (back in 2002), Farmers Insurance pulled out of the state, and State Farm adopted a policy of not taking on new business. Not surprisingly, this public policy crisis has resulted in Texas being able to claim (not proudly) the number 1 spot in the United States for having the most expensive homeowners insurance. Anyway, the homeowners insurance crisis set in motion various regulatory reforms, including the adoption of new policy forms which substantially limits mold coverage for most homeowners. We are now finally starting to see the fruit of this policy.
An important aspect of the theory of finance is the notion that market prices reflect unbiased estimates by market participants concerning future events. Since we are now “full swing” into a political season, it is interesting to see how markets view the upcoming presidential election in the United States.
The first known implementation of real-money futures markets for outcomes of political elections was created by faculty members at the University of Iowa’s Tippie College of Business. Their initiative is commonly known as the Iowa Electronic Markets (aka IEM). Currently, the following contracts are being offered at IEM:
2004 U.S. Democratic Convention Market
2004 U.S. Presidential Election Vote Share Market
2004 U.S. Presidential Election Winner Takes All Market
2004 U.S. Congressional Control Market
2004 U.S. House Control Market
2004 U.S. Senate Control Market
Another interesting example of political futures markets can be found at tradesports.com, a Dublin, Ireland website which became famous during 2003 for offering futures contracts on whether Saddam Hussein would remain in power in Iraq. The tradesports.comcontracts are defined as “all or nothing” futures contracts which pay off $100 if a predefined event occurs and $0 otherwise. Consequently, the price is essentially a probability measure. The set of contract offerings at tradesports.com is much broader than what is currently being offered at IEM. For a list of current price quotes, go to the tradesports.com website, click on the “All Events” tab, and then click on “Politics”, which is located under the “Current Contracts” column.
With the kind help of my good friends and colleagues Martin Grace and Grant McInnes, I have created this blog for the purpose of posting information related to various topics that interest me. Access to Grant’s blog is restricted, but I highly recommend Marty’s blog, aka “RiskProf“. Marty likes to blog about the topics related to the economic analysis of law, particularly in areas such as tort reform and liability.