INTERPRETING POLITICAL PREDICTION MARKET PRICES AS PROBABILITIES: A STUDY OF A 2008 U.S. PRESIDENTIAL ELECTION MARKET

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Published: Dec 19, 2012
DOI: https://doi.org/10.5750/jpm.v5i3.491

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John F Kros
College of Business East Carolina University
Enping Mai
Christopher M Keller
College of Business East Carolina University

Abstract

 Daily trading in INTRADE’s 2008 U.S. Presidential electoral markets is analyzed in this paper.  INTRADE provides a unique bridge connecting the political voting literature and the price probabilities in the growing prediction market research.  Since these markets involve only fixed return options, it is plausible, assuming risk-neutrality, to interpret the ratio of an option’s price to the option’s fixed return as representing the probability of the option being “in the money”.  Observed price-probability differences are contraindicated by the theory of risk-neutral market efficiency.  Several authors have theorized variously generalized rubrics of non-risk-neutral utility preferences that purport to explain these price-probability differences.   This paper demonstrates, using historical vote participation estimates, that observed price-probability differences can be explained as a function of the variability of voter turnout in a political prediction market.

Article Details

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Vol. 5 No. 3 (2011): Elections and Prediction Markets
Section
Articles

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