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

John Kros, Enping Mai and Christopher Keller

Journal of Prediction Markets, 2011, vol. 5, issue 3, 27-41

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.

JEL-codes: L83 (search for similar items in EconPapers)
Date: 2011
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