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My Two Cents

Presidential Market and the Dow

Chris Farrell Jul 15, 2008

One way to track how the election is going is through political prediction markets. These futures contracts, which bet on the election outcome, trade on these markets just like corn or oil futures. One such betting market is at Intrade, an Irish-based futures market.

There is good reason to monitor the prediction markets: Academic research shows their track record at foretelling election outcomes is better than that of polling data. After all, investors aren’t just pontificating–they have money on the line.

While the presidential futures markets are relatively new, betting on politics has
a long history. There were well-organized Presidential betting pools between 1868 and 1940, according to the book Historical Presidential Betting Markets, by economists Paul W. Rhode and Koleman S. Strumpf of the University of North Carolina, Chapel Hill.

In the late 19th and early 20th century, for example, betting on the Curb Exchange in New York (which evolved into the American Stock Exchange) and in the lobby of the New York Stock Exchange at times exceeded trading in stocks and bonds. In the New
York markets, wagering on a Presidential election peaked with some $198 million (in 2008 dollars) in bets placed in 1916. That’s when Democrat Woodrow Wilson came from behind to defeat Republican challenger Charles Evans Hughes. The amount gambled that year was twice the sum spent on the campaign. Rhode and Strumpf calculate that an average of $44 million, in 2008 dollars, was bet during Presidential contests from 1884 to 1928.

Here’s an interesting note from Intrade from today:

The Political Prediction Markets

Obama’s Intrade Market Soars, DOW Plummets: A Very Strong

(-0.91) Negative Correlation

(Dublin, Ireland -Tue. 15 July 2008) Intrade’s market data shows that the sliding Dow Jones Industrial Average has an exceptionally strong negative correlation (approx. -0.91 over the last 10 weeks) with the rise in the Intrade Market for Barack Obama to be the next US President.

Intrade’s market data shows that the weakening Dow Jones Industrial Average has an exceptionally strong negative correlation (approximately -0.91) with the strengthening probability that Barack Obama will win in November.

Between May 6th and July 10th Obama is up 11 points or 20.04%. The Dow is down 1791.81 points or -13.76%. The correlation for this period between Obama’s rise and the Dow’s fall is -0.91. On July 14th Obama closed at 68.0 with John McCain closing at 31.1, a difference of 36.9 or 54.26%.

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