January 11, 2008

New Hampshire and the Stock market.

The result New-Hampshire election results seems to imply quite a criticism of the efficiency of the stock market. In particular it affirms Keynes’s speculation that they were controlled by ‘animal spirits’.

What is in-trade?
The in-trade website is basically a political betting website. There are bonds that pay out, say, $100 if Clinton wins the 2008 election and $0 if she doesn’t. These bonds are then traded among market players (with there typically being a volume of thousands in each market). Therefore if the market price for this bond is $23 then this implies that the market believes that Clinton will win the 2008 election with a probability of 23%.

Total Predictive Failure:
In the new Hampshire elections McCain won for the republicans and Clinton won for the democrats. But looking at the history of in-trade market prices for the ‘McCain to win New Hampshire’ and ‘Clinton to win New Hampshire’ shows that these totally shocked the market.
A little more then a month ago the market predicted McCain to win the election with a probability little more then zero. While a week ago the market was clueless over whether Clinton or Obama would win (hence giving them both a 50% rating), and then totally misinterpret the Iowa result and thus leading them to place nearly a zero probability on her winning just days before she won.

McCain’s price history:
McCain
Clinton’s price history:
Clinton

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