The idea of relying upon futures markets prices to forecast future events has an interesting history. Nearly 20 years ago, Richard Roll published a paper in the American Economic Review entitled “Orange Juice and Weather” which showed, among other things, that the futures market in orange juice concentrate is a better predictor of Florida weather than the National Weather Service. Since the only way one can earn excess profits in a speculative market is to gain an informational advantage over the competition, traders are strongly motivated to try to do just that. As I noted in my previous blog entry about political “futures” markets (see ‘Political “futures” markets I’), if markets are informationally efficient, it follows that market prices represent unbiased forecasts concerning future events. Technically, this means that on average, the market’s estimate of the average value of the event in question is likely to be quite accurate. Consequently, I believe that political “futures” markets are more reliable indicators of the odds of a Bush or Kerry win than surveys conducted by the various media companies. With this in mind, it is interesting to observe what the political futures markets are telling us. As Alex Tabarrok notes, the market prediction of a Bush victory has hit an all-time low; I just checked the tradesports.com website, and today’s closing price for the PRESIDENT.GWBUSH2004 futures contract (George W. Bush is re-elected as United States President) is $49.60, which indicates that the election today is quite literally a tossup (note: since the tradesports contracts pay off $100 if a predefined event occurs and $0 otherwise, the reported price is essentially a probability measure). However, it does appear that regardless of which party wins the presidential election, the House and Senate will most likely have Republican majorities. This is evident because today’s closing price for the SENATE.GOP.2004 futures contract (Republicans maintain control of the US Senate in 2004 Election) is $76.50, whereas today’s closing price for the HOUSE.GOP.2004 futures contract (Republicans maintain control of the House in 2004 Election) is $87.

American Economic Review entitled “Orange Juice and Weather” which showed, among other things, that the futures market in orange juice concentrate is a better predictor of Florida weather than the National Weather Service. Since the only way one can earn excess profits in a speculative market is to gain an informational advantage over the competition, traders are strongly motivated to try to do just that. As I noted in my previous blog entry about political “futures” markets (see ‘Political “futures” markets I’), if markets are informationally efficient, it follows that market prices represent unbiased forecasts concerning future events. Technically, this means that on average, the market’s estimate of the average value of the event in question is likely to be quite accurate. Consequently, I believe that political “futures” markets are more reliable indicators of the odds of a Bush or Kerry win than surveys conducted by the various media companies. With this in mind, it is interesting to observe what the political futures markets are telling us. As Alex Tabarrok notes, the market prediction of a Bush victory has hit an all-time low; I just checked the tradesports.com website, and today’s closing price for the PRESIDENT.GWBUSH2004 futures contract (George W. Bush is re-elected as United States President) is $49.60, which indicates that the election today is quite literally a tossup (note: since the tradesports contracts pay off $100 if a predefined event occurs and $0 otherwise, the reported price is essentially a probability measure). However, it does appear that regardless of which party wins the presidential election, the House and Senate will most likely have Republican majorities. This is evident because today’s closing price for the SENATE.GOP.2004 futures contract (Republicans maintain control of the US Senate in 2004 Election) is $76.50, whereas today’s closing price for the HOUSE.GOP.2004 futures contract (Republicans maintain control of the House in 2004 Election) is $87.]]>

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

For readers who are interested in seeing current price quotes for the IEM political markets, go to http://128.255.244.60/quotes.

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.

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

For readers who are interested in seeing current price quotes for the IEM political markets, go to http://128.255.244.60/quotes. 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.