Tuesday, September 16, 2008

Arbitrage opportunities

The Prime Minister markets currently show a 26% chance of a Labour-led government and a 74% chance of a National-led government.  

In the Party Vote markets, Labour and its most likely allies (Green, Maori, NZ First) sum up to 53% of the vote; National and Act together sum up to 51% of the vote.  Yes, the sum of all bids is about $1.04 and there's then a risk-free arbitrage opportunity for anybody who wants to short the set of all party vote stocks.  There is an inconsistency across the two markets though: from the Party Vote markets, it looks like we're headed for a Labour-led government, while that's very unlikely according to the Prime Minister markets.

I'm going to go and do a bit of work to take advantage of a bit of that arbitrage, but I'm curious why nobody else out there is working on this one.  Either the sum of bids on the Labour side in the vote share market is too high, or Labour's chances in the PM market is too low, or a combination of both.  Any other traders out there have any insights?


1 comment:

Anonymous said...

It is due to the requirement of getting 5% of the party vote to get a seat unless you win an electorate seat. If Winston does not win Tauranga and does not get 5% of the party vote then he is gone. So he would have no part in deciding who the next prime minister is but would pay out 10c per 1% of the party vote. United Future etc may also have a role in deciding the next government.