Bayesian Investor Blog

I have implemented subsidies to encourage trading of some conditional prediction market contracts that may provide useful information about the consequences of the 2008 presidential election, via a simple automated market maker (using an algorithm described near the end of http://hanson.gmu.edu/ifextropy.html). The subsidized market maker ought to provide incentives for traders to devote more thought to these contracts than they would if the liquidity was less predictable.
Intrade has agreed not to charge any trading or expiry fees on these contracts.
Some places to look for extensive description of the motivations behind these subsidies are here and here.

The contracts are:

• Oil Futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
  
  This will use the change in the December 2011 Light Sweet Crude Oil futures
  contract from the close before the election (Monday) to the close after the election (Wednesday). A price higher than 50 should suggest that a Democratic victory will cause oil prices to be higher than they otherwise would be, while a price below 50 should suggest that a Democratic victory will cause lower oil prices.
  PRESIDENT.DEM2008 refers to the Intrade contract for "Democratic Party Candidate to Win 2008 Presidential Election".
• Treasury bond interest rate futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
  
  This will use the change in the December 2008 30-year US Treasury Bond futures contract from the close before the election (Monday) to the close after the election (Wednesday). A price higher than 50 should suggest that a Democratic victory will cause bond prices to be higher (and long term interest rates lower) than they otherwise would be, while a price below 50 should suggest that a Democratic victory will cause lower bond prices (and long term interest rates higher) .
• Number of US troops in Iraq on 30 June 2010 if a Democrat is elected president in 2008
• NONDEM.PRES-TROOPS.IRAQ: Number of US troops in Iraq on 30 June 2010 if a non-Democrat is elected president in 2008
  
  These are scaled claims whose value will range from 0 if the troop levels are zero to 100 if the troop levels are 200,000 (or more).
  
• Increase in US Government debt if Democrat elected president in 2008
• Increase in US Government debt if non-Democrat is elected president in 2008
  
  Note that the change in debt is usually quite different from what
  is reported as the budget deficit. The debt numbers will be taken from a
  source such as the
  St. Louis Fed
  Series GFDEBTN, Federal Government Debt
  
  These are scaled claims whose value will range from 0 if the debt does not increase to 100 if the debt increases by $1 trillion (or more).

Please read the detailed specifications at Intrade before trading them, as one-line descriptions are not sufficient for you to fully understand them.
For the first two of those contracts, the market maker will enter bids and asks of 38 contracts, and can lose a maximum of $5187.76 on each contract. For the other four contracts, the market maker will enter bids and asks of 115 contracts, and can lose a maximum of $7906.25 on each contract.
I will maintain a web page here devoted to these contracts.
See also this more eloquent description on Overcoming Bias.

This entry was posted on Friday, January 4th, 2008 at 9:04 am and is filed under Idea Futures, U.S. Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.