Sunday, October 19, 2008

Obama prices

I'd noted previously that there have been pretty big price discrepancies in the Obama/McCain prices across different markets. Turns out now that the reason InTrade has been so low, relative to the others, is that a decent-sized institutional investor has been hedging on InTrade against the possibility of a McCain win by buying McCain shares. For more discussion, see here and here and here and here and here.

Now, why might somebody want to hedge against political risk? For the same reason that they might want to hedge against any kind of risk! So, you could imagine that a defence contractor might want to hedge against the possibility of an Obama win, and a biotech firm big on stem cell research might want to hedge against the possibility of a McCain win.

Hedgers will increase the return to informed traders, just like anybody else who's trading for non-informational reasons. But, if the hedger is big relative to the market, it can have a reasonable effect on prices for a very long time, as shown in the InTrade example. It's only in the last few days that InTrade prices have come up to match those here, on the IEM, and at BetFair.

As iPredict allows only $1000 deposited every 6 months, we're not a useful vehicle for hedging against political risk. So, we shouldn't see that kind of non-informational trading affecting our prices.

I note this morning that our prices on Obama are on par with those over at Iowa and higher than those at BetFair and InTrade.

Full disclosure: I'm long Obama, but sold off a good chunk of my position at $0.885.

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