Tag Archives: event derivative markets

Washington Mutual is seized by the US government.

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– New York Times

– Another one bites the dust:

(Sorry for those who have a narrow screen and don&#8217-t see the right part of this big chart.)

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According to InTrade, here are the banks that could fail next:

– Bank United Financial

– Downey Financial

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External Links About The Big Bailout:

– Reason magazine have collected opinions from the leading free-market economists on the Bailout issue.

There is no reason to expect the correct solution from the same people who created the crisis in the first place and who until very recently thought the economy was strong and that there was little or no chance of recession. [Mark Thornton]

This is a financial coup d&#8217-etat, with the only limitation the $700 billion balance sheet figure. [Yves Smith]

– Mike Linksvayer has some additional good links&#8230- and some strong words, too. :-D

– Arnold Kling:

– NYT:

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UPDATE: Paul Krugman

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UPDATE: The Manhattan Institute on financial crisis and the Bailout

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UPDATE:

As Justin Wolfers noted, maybe there are today bigger practical obstacles to prediction market arbitrage.

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– Legal restrictions for US traders on foreign prediction exchanges (BetFair, etc.)-

– Transaction fees (you would need to operate on 2 exchanges)-

– Currency risks and cost for hedging on that.

Eric Crampton (a Canadian exiled in New Zealand) says he has managed to turn a buck, though, by arbitraging between InTrade and iPredict New Zealand. He also makes 2 theoretical points. Go read it.

Is InTrade being manipulated? Why does InTrade give a discounted probability for Barack Obama as US president?

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A quick link panorama.

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#1. Is InTrade being manipulated?

– Nate Silver shows that there are abrupt downward pressures on the Barack Obama event derivative, while we also see some abrupt upward pressures on the Hillary Clinton event derivative.

However, you can see by yourself that InTrade is resilient enough and does a great job of going back to normal [*], after just a few hours of trading:

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– At Portfolio, blogger Zubin Jelveh blows the incidents out of proportion.

– Professor Lance Fortnow has a more careful analysis and notes that the price of the Barack Obama bounces back quickly enough.

– Quick thought: Maybe the media should use an average of event derivate prices for the last 5 work days&#8230- so that the abrupt perturbations would be eliminated.

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[*] UPDATE:

Professor Eric Zitzewitz:

I’m not sure you can conclude from Silver’s graphs that the market goes “back to normal.” You can conclude that it moves back in the opposite direction of the impact those large trades. Back when the Hillary for President market looked like it was being manipulated, it appeared that the manipulator was both placing a large purchase and then placing limit orders to provide price support and slow down the reversion of the price.

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UPDATE: Are we witnessing manipulation attempts on the &#8220-Florida to vote Republican&#8221- prediction market at InTrade?

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#2. Why does InTrade give a discounted probability for Barack Obama as US president?

– As you remember, Emile Servan-Schreiber of NewsFutures believes that it&#8217-s a Republican conspiracy all over.

– Professor Justin Wolfers puts up an hypothesis: it&#8217-s legally impossible for US traders to arbitrage on BetFair.

– InTrade put up a crappy excuse: the industry is still too &#8220-young&#8221-. How lame. How stupid. The industry was younger in the previous elections, where arbitrage opportunities didn&#8217-t exist according to professors Justin Wolfers and Eric Zitzewitz (see their 2004 paper and their other publications).

– Blogger Zubin Jelveh swallows the InTrade P.R. line, and adds another crappy InTrade P.R. line: More arbitrage opportunities are being exposed in open air because much more observers are hunting down arbitrage opportunities in 2008 than in previous elections. That&#8217-s a second blatant cretinery, uncorrected by the Portfolio blogger. Re-read Justin Wolfers&#8217- blog post. Professor Justin Wolfers states that:

The current variation in price is larger than I have ever seen in my years of studying prediction markets. The forces of arbitrage that would typically eliminate these differences have been handicapped by the legal restrictions preventing U.S.-based traders from using overseas markets.

– Finally, professor Lance Fortnow says nothing about the arbitrage opportunities between InTrade and BetFair, but does offer some technical points about the issue of polls versus the prediction markets, centered around the question of state correlations. Read on.

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UPDATE: Eric Crampton (a Canadian exiled in New Zealand) says he has managed to turn a buck by arbitraging between InTrade and iPredict New Zealand. He also makes 2 theoretical points. Go read it.

UPDATE: Greg Mankiw just linked to Nate Silver.

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2008 US Presidential and Congressional Elections Prediction: The Sarah Palin effect has partially evaporated, but its remains point to a close race, come Tuesday, November 4, 2008.

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#1. Explainer On Prediction Markets

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Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out&#8230- Intelligence in, intelligence out&#8230-

A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur- and 4 times out of 10, the unfavored outcome will occur.

Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.

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More Info:

– The Best Resources On Prediction Markets = The Best External Web Links + The Best Midas Oracle Posts

– Prediction Market Science

– The Midas Oracle Explainers On Prediction Markets

– All The Midas Oracle Explainers On Prediction Markets

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#2. Objective Probabilistic Predictions = Charts Of Prediction Markets

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Put your mouse on your selected chart, right-click, and open the link in another browser tab to get directed to the prediction market page of your favorite exchange.

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2008 US Elections

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InTrade

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2008 US Electoral College

2008 Electoral Map Prediction = InTrade – Electoral College Prediction Markets = Probabilistic predictions for the 2008 US presidential elections based on market data from InTrade = electoralmarkets.com

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– This is a dynamic chart, which is up to date. Click on the image, and open the website in another browser tab to get the bigger version.

ProTrade vs. Sports Derivative Exchange

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I asked Chris Hibbert whether they are &#8220-exchanges&#8221-.

Chris Hibbert:

It looks like it from a cursory glance. In both cases, you can buy and sell, and the prices appear to be set by market interactions rather than institutional fiat. They both have a feedback mechanism based on “dividends” produced by on-field performance. ProTrade has a sophisticated formula that takes into account the players’ contribution to a winning season. SDX seems to base their dividends purely on wins and losses. The latter is easier to understand, and probably closer to the way most fans think about things. I think ProTrade is justified in believing they are closer to capturing the individual athlete’s contribution.

There’s also the difference in betting on players or teams. I think both might be helped by offering bets based on both players and teams. But until they cover hockey, I won’t spend a lot of time there. I don’t want to have to start following one of the major sports in order to bet in these play money markets.

ProTrade has a market maker, and SDX uses book orders.

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External Links:

– ProTrade

– Sports Derivative Exchange

– Zocalo (the open-source software for enterprise prediction markets, coded by Chris Hibbert)

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UPDATE: The SDX co-founder has a comment.

With regard to the 2008 US elections, both Justin Wolfers and Robin Hanson implied that BetFair is not as predictive as it should be.

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Previously: About Justin Wolfers&#8217-s column

Justin Wolfers&#8217- Freakonomics post (which suggests that BetFair would have a better predictive power if US traders could use it).

InTrade vs. the other prediction exchanges

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Justin Wolfers gives his views about the (now past) differences between the probabilistic predictions given by InTrade on the 2008 US presidential elections&#8230- and the ones generated by the other real-money and play-money prediction exchanges. One hypothesis: US political insiders can&#8217-t access BetFair, legally, and thus can&#8217-t arbitrage. (But they can trade legally on the Iowa Electronic Markets, NewsFutures, Inkling, and HubDub, one could retort.)

Emile Servan-Schreiber&#8217-s hypothesis still holds.

Or else &#8212-your own hypothesis is welcome.

P.S.: The latest news is that InTrade now gives Barack Obama slightly above John McCain.

Nobel laureate Gary Becker and judge Richard Posner both wish that, one day, real-money prediction markets will be legal, without restrictions, in the United States of America.

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Via David Pennock of Odd Head fame

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Gary Becker:

[…] I believe that online political prediction markets, and other online prediction markets as well, should be legal in the United States and elsewhere, even if the amounts bet were quite large. There is no important substantive difference between such online betting markets and the Chicago Mercantile Exchange and other exchanges that allow individuals and organizations to take positions on movements of stock indexes, housing price indexes, and prices of other derivatives. A distinction is sometimes made between political betting markets and derivative markets since participants in derivative markets may be hedging other risks that they face. Yet this distinction has little substance since if larger bets were allowed in online political markets, groups whose welfare depended greatly on political outcomes would make greater use of these markets. For example, if a Republican presidential win would mean greater spending on military weapons, companies in the arms business might hedge their risks by betting on Barack Obama.

If large bets were allowed, some wealthy groups may bet a lot on their candidates in order to exert bandwagon influences on public opinion through their large bets affecting market odds. If so, these markets likely would become less reliable as predictors of outcomes, and hence would have less influence on opinions. To a large extent, therefore, these markets would be self correcting, although online political markets might place various other restrictions on bets, as is common in derivative and other exchanges.

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Richard Posner:

[…] There is an interesting question whether prediction markets should be thought of as &#8220-gambling” and perhaps prohibited. As a matter of policy, that would be a mistake, even if one thinks that gambling should be prohibited. The prediction markets are markets for speculation, rather than for game-playing or risk-taking. Slot machines, card-playing, roulette wheels, and other conventional forms of gambling do not generate socially valuable information. Speculation does. Commercial speculation serves to hedge commercial risks and bring prices into closer phase with value. Political, cultural, etc. prediction markets also yield socially valuable information. The outcome of elections is important to companies and even individuals for whom particular public policies are important- they may wish to make adjustments to avert or exploit looming political change. Politicians too need to have as sharp a sense as possible about the effects on the electorate of their and their opponents&#8217- strategies. Apparently they can get more accurate information from the prediction markets than from the public opinion pollsters.

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WORLDS MOST EXPERIENCED PREDICTION MARKET PRACTITIONER CASTS A DOUBT ON THE VALIDITY OF MSR, IN USE IN MOST PUBLIC PLAY-MONEY PREDICTION EXCHANGES AND IN MOST ENTERPRISE PREDICTION EXCHANGES.

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WE ARE BETFAIR. RESISTANCE IS FUTILE. YOU WILL BE ASSIMILATED.

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A list of the Betfair forum threads about the new premium charges.

A FaceBook group has been created to protest the new BetFair premium charges.

PREVIOUSLY: BetFair impose new &#8220-Premium Charges&#8221-&#8230- Do BetFair gag the critics, too?