I’m becoming less confident about the accuracy of the online futures markets in predicting the outcome of the presidential race. Intrade’s Bush re-election market sold off into the debate, rallied during and sold off after. This behavior seems odd, and is similar to what the same market did during the previous presidential debate and the vice-presidential debate. (I didn’t follow the first presidential debate.)
It’s occurred to me that partisans might be trying to manipulate the markets (Glenn Reynolds and Tom Smith have similar ideas, as I suspect do other observers). While I have no evidence for this possibility, consider it on a cost/benefit basis. Political futures markets aren’t so deep that a trader, or consortium of traders, willing to spend a few hundred grand couldn’t bias them against Bush for days or weeks at a time. Given the increasing credibility of these markets, and given the high cost of conventional advertising, selling a big lot of Bush re-election futures might be a relatively inexpensive way to help Kerry. (Of course the bill would come due eventually, if Bush won, but in that case the inevitable market pop might not occur until shortly before the election, in which case money invested in holding down Bush’s numbers would have been well spent.)
I think that these markets are a great tool, and that they will eventually equal or surpass conventional opinion-polling in the degree to which they become accepted by the media and public for political prediction. But markets aren’t perfect. Someone told me that James Cramer on CNBC suggested that Democratic hedge-fund managers are buying oil futures in an attempt to boost oil prices and hurt Bush politically. I am skeptical about Cramer’s idea: oil has been rallying for a variety of reasons, it’s a huge market and manipulation of huge markets tends to be prohibitively costly for prospective manipulators. But if Cramer is saying it, it means other traders are thinking it. And if they think it about oil, what about the relatively illiquid elections markets? It seems likely that politically engaged traders have considered, if not actually attempted, trying to push those markets their way. I don’t know whether they have succeeded. Perhaps this would be a fruitful area for systematic research.
OTOH, it could be that the election really will be as close as the online markets suggest it will be. We’ll know soon enough.
UPDATE: Lex reminds me that the election odds shown by online bookmakers have roughly paralleled the odds shown by Intrade and the Iowa Markets. His observation supports the close-election hypothesis.
UPDATE2: Don Luskin suspects manipulation.