NEW YORK (HedgeWorld.com)–By and large, electronic trading of political futures instruments accurately predicted the outcome of the 2004 U.S. Presidential election, bolstering the argument that these markets have an edge over polls.
The winner-takes-all market run by the University of Iowa School of Business, one of several run by the school, showed Bush substantially ahead of Kerry throughout September and October. The lead narrowed after the debates but never reversed during the two months.
In terms of the aggregate probability of winning, calculated from the prices of two Republican contracts and two Democrat contracts, Bush reached a high point of US$0.74 in late September, while Kerry went below US$0.33 at that time. Contract payoff is US$1 on the Iowa Electronic Markets, which are designed so that process should predict election outcomes.
The Democratic candidate closed the gap in many polls but not according to traders in political futures. Persistently, Kerry futures remained below $0.50 and Bush futures above $0.50 on the Iowa exchange.
While the Iowa markets are used for research by the university, Ireland-registered Tradesports.com is a commercial enterprise. Traders’ forecasts were similar, however, with Bush winning over Kerry by 60-to-40 much of the time.