The electoral stock market (also referred to as the electoral prediction market ) is the financial market where the final value of the traded contract is based on election results. Participants invest their own funds, buy and sell registered contracts, earn profits and assume the risk of losing money. The stock exchange market functions like any other futures exchange, such as commodity exchanges for delivery of wheat, cattle, or precious metals in the future.
The main purpose of the electoral stock market is to predict the election results, such as the part of popular vote or the share of seats that every political party receives in the legislature or parliament. Efficient markets are excellent at reflecting all available information, often reflecting information faster than polls, which take several days to complete and process. Merchants also have strong financial incentives to reflect their true opinions about election results regardless of their political preferences.
Election stock markets are also used for research and teaching purposes. Researchers can study trader behavior and market operations. The electoral stock market also teaches participants about the basics of trade, such as how to take long positions or short . A list of related academic research papers appears below.
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In North America, two universities have operated the electoral stock market for over a decade. Tippie College of Business The University of Iowa has operated Iowa Electronic Markets [1]. The Iowa market mainly tracks presidential and congressional elections. In Canada, the University of British Columbia's Saudara Business School has operated UBC Election Shares Market. The UBC market tracks federal and provincial elections in Canada. The Iowa Market and UBC are non-profit operations for research purposes. These markets do not charge commissions or transaction fees. Investment is usually limited to USD 500 or CAD 1,000.
Private market predictions have also emerged in recent years. Unlike their colleagues, commercial prediction markets charge fees or commissions to cover their operating costs. Commercial markets may charge a fee per transaction or commission on net income, and the cost per transaction can be differentiated for price takers (who place market orders) and price-fixers (who place limit orders). Examples of commercial prediction markets include Intrade Prediction Markets and The Washington Stock Exchange; both tracking predictions for a wide range of political events. Commercial prediction markets claim that they attract more investment and generate more trading volume than their academic counterparts because they do not limit the capital investment of a trader. The accuracy of market predictions of commercial and academic electoral stocks is the field of active research (see below).
Maps Election stock market
How does an electoral stock market work?
Market type
There are two basic types of electoral stock market. The first type is a win-take-all market where only one contract pays a fixed amount, usually $ 1, and all other contracts pay $ 0. Examples of this win-take-all market include the results of a referendum (yes or no), one of some party won an absolute majority, or one of several parties won a large sum.
Another type of electoral stock market is a proportional share market in which the payment of multiple contracts is determined by the percentage of the proportion of a given product, multiplied by the usual sum of $ 1. Two examples of such a market include the stock market seats, where payment is determined by the percentage of seat share obtained by a particular party in parliament, or a popular voice stock market, where the payment is determined by the percentage of a part of the popular party vote.
The general principle in different types of stock market elections is that payments for "portfolio units" of contracts must add up to a fixed amount, usually $ 1.
Creating a contract
The contract is put into circulation through the purchase of the portfolio unit . A trader buys a set of all contracts in a given market for $ 1. Consider the election in which the three parties compete, the Red Party, the Blue Party, and the Green Party. The popular share of votes for each party must be 100% by definition, so holding on to one contract for each of the three parties will always be worth $ 1 no matter what the election results are. Buying a portfolio unit allows traders to take short positions by selling contracts that they think are overvalued.
Trading contract
Merchants buy and sell contracts, which are usually quoted in 1/10 cents according to 1/10 percentage points for the distribution of votes or division of seats from political parties. Traders benefit by purchasing unappreciated contracts and selling contracts that are overvalued. If a trader expects the Blue Party to win 42.3% of popular votes, traders will find it advantageous to buy a contract from the Blue Party if the seller offers it less than 42.3 cents. The same merchant would find it advantageous to sell the same contract if another merchant would buy more than 42.3 cents.
Taking a long position
Traders take long positions by buying low and selling high. Consider an investor who considers a contract purchase at Blue Party, which is currently offered for 39.3 cents on the market. Investors predict that the Blue Party will win over 41%, and buy a contract from the Blue Party for 39.3 cents. On election day, Blue Party won 42.5% of popular vote, and traders realized a gain of 3.2 cents, investment return of 8.1%.
Taking a short position
Consider a trader who has purchased a portfolio unit of one contract each for the Red, Blue, and Green Party, at a cost of $ 1. Believing that the contract for the Blue Party is overvalued at the current price, the merchant sells one contract from Blue Party for 30 cents. On election day, the Red Party won 55% of the vote, the Blue Party won 25% of the vote, and the Green Party won 20%. Traders now receive 75 cents in total for Red and Green Party contracts, and have an additional 30 cents from Blue Party sales contracts. The merchant now has $ 1.05 and has generated a 5 cent profit on an investment of $ 1.
Market liquidization
Election stock markets usually stop trading the day before elections are held. Markets are liquidated after election by election results. In the market for popular vote share and parliament seat shares, each contract is rated exactly equal to the corresponding percentage. In the win-take-all market, the winning contract pays $ 1, while the losing contract pays $ 0.
The reliability of the electoral stock market
Election stock market is a prediction market for a specific purpose: election. Although stock market elections have been in place for nearly twenty years, the accuracy of these markets is almost always judged by comparing the stock market's (closing stock) stock forecasts on election night with the final voting result and actual results. Evidence that electoral stock markets are very successful in predicting election results is found in a series of academic papers, largely based on data from Iowa Electronic Markets and UBC Election Shares Market. Accuracy is usually measured as an average absolute error of error for the stock of sound and stock of seats. A more rigorous attempt to assess the performance of the electoral stock market is found in Berg et al. (2008); they reported that for five recent elections covered by Iowa Electronic Markets, the absolute average error in market predictions of the presidential election for 5 days before the election was 1.20 percentage points, while the polls were conducted over a period of time same. time has an average error of 1.62 percentage points. Berg et al. (2008) also reported evidence that the electoral stock market outperformed the polls for a longer period before the election date.
Erikson and Wlezien (2008) challenge the view that the electoral stock market outperforms the polls. They argue that the polls only measure preference on voting days, while stock market elections predict results on election day. When the polls were discounted using statistical techniques, they found that the poll-based forecast outperformed the sound stock market price.
An important feature for the functioning of the electoral stock market is the market liquidity. Since prediction markets function through the aggregation of beliefs and opinions into market prices, high trade volumes and/or the continuing flow of new investments are essential for prices to provide accurate estimates of election results. Signs that liquidity is lacking in the stock market include broad spreads (big difference between bid and ask prices) and arbitrage opportunities (where the bid amount exceeds the portfolio value of the unit, or where the demand for the price is lower than the portfolio value of the unit). Since the electoral stock market is an opinion aggregator, such market accuracy can be expected to increase with the number of market participants. Hat investments (such as those managed by Iowa Electronic Markets and UBC Selection Shares Market) level of trading opportunities among traders. Whether the investment cap helps with prediction accuracy has not been determined convincingly. However, without an investment cap, the stock market of commercial election can be dominated by a small number of traders. The existence of transaction costs for investments and trade in the commercial stock selection market can also reduce their efficiency.
Sunstein (2006) argues that the prediction market is often more accurate than the negotiating group because the predictive market creates strong incentives for disclosure of personally held knowledge and successfully gathers widespread information. In contrast, negotiating groups often reinforce individual errors, and group members can be victims of a bad cascade, both information and reputation. Deliberators can emphasize shared information at the expense of uniquely owned information.
Academic paper
- Antweiler, Werner; Ross, Thomas W.: UBC Election Shares Market 1997. Canadian Business Economics, Vol. 6, No. 2, April 1998, p. 15-22.
- Berg, Joyce E.; Nelson, Forrest D.; Rietz, Thomas A.: Predicted market accuracy in the long run. International Journal of Forecasting, Vol 24, No. 2, April-June 2008, p. 285-300.
- Brander, James A. Elections, free trade, and the stock market: evidence of Canada's 1988 election. Canadian Journal of Economics, volume 24, November 1991, pp. 827-43.
- Erikson, Robert S.; Wlezien, Christopher: Is Political Market Really Superior to Polls as an Election Predictor? Public Opinion Quarterly 72 (2), Summer 2008, pp. 190-215.
- Forsythe, Robert; Rietz, Thomas A.; Ross, Thomas W: Wishes, Expectations and Action: Survey on Price Formation in the Stock Exchange Market. Journal of Economic and Organizational Behavior, volume 39, 1999, pages 83-110.
- Forsythe, Robert; Frank, Murray; Krishnamurthy, Vasu; Ross, Thomas W.: Markets as Predictors of Election Results: Campaign Events and Biased Judgment in the 1993 Election Stock Market. Canadian Public Policy, volume 24, 1998, p. 329-351.
- Forsythe, Robert; Frank, Murray; Krishnamurthy, Vasu; Ross, Thomas W.: Using market prices to predict election results: UBC electoral stock market 1993. Canadian Economic Journal, volume 28, number 4a, November 1995, pp.770-794.
- Forsythe, Robert; Nelson, F.; Neumann, G.R; Wright, J.: Anatomy of the experimental political stock market. American Economic Review, volume 82, 1992, p. 1142-1161.
- Forsythe, Robert; Nelson, F.; Neumann, G.R; Wright, J.: Iowa political market: field trials. Research in Experimental Economics, volume 4, 1991.
- Gemmill, Gordon: Political risk and market efficiency: tests based on the stock market and British options in the 1987 election. Journal of Banking and Finance, volume 16, February 1992, pp. 211-231.
- Manski, Charles F.: Interpret predictive market predictions. Economic Letters, Vol. 91, No. 3, pp. 425-429.
- Sunstein, Cass R: Group Communicating versus Market Predictions (or Hayek Challenge to Habermas). Episteme 6 (1), October 2006, pp. 192-213.
- Wolves, Justin; Zitzewitz, Eric: Market Prediction. Journal of Economic Perspectives 18 (2), Spring 2004, pp. 107-126.
Academic journals
- The Journal of Prediction Markets
Popular articles
- Stix, Gary: Super Tuesday: The Market Predicts Better Results Than Polls. Scientific American, March 2008.
References
External links
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