Friday, October 31, 2008

Our next government redux

One of the advantages of being at Canterbury in October is that Sir Clive comes to visit. Sir Clive won the Nobel a couple of years back for his work in economic forecasting and economic statistics. So I asked him if I'd screwed up anything major in the post below. He said the overall technique should be reasonable for what we're trying to do here, but that I'd made a minor error: the correct probability of National forming the next government, at the current prices in the vote share market, is 60.6%, not 57%. I'd made the rather silly error of adding up the standard deviations rather than adding up the variances.

So we have four options.
1. The prices in the PM markets are wrong
2. The prices in the VS markets are wrong
3. The underlying distributions are highly skewed rather than symmetrical.
4. The Maori party is more likely to go with National than NZ First is likely to make it into Parliament.

We've eliminated 3a, which was the "Eric's completely screwed this up" option as I now have the Sir Clive seal of approval. And you're not going to do better than that in New Zealand currently.

I'm complementing my positions in the PM markets with the appropriate inverse positions in the VS markets as a quasi-arbitrage.

Prices in the VS markets have moved such that they're now consistent with a 63 seat National-ACT-Dunne coalition to a 60-seat Maori-Labour-Green-Anderton block. This is going to be a lot closer to the probabilities implied in the PM market, but I need to work the numbers out. We've now opened markets on whether Maori will support National on confidence and supply. The most likely outcome, according to that market, is that Maori will abstain on supply and confidence, in which case PM.National is more likely: it's then a 63 - 54 situation with 6 abstentions. The market has it more than twice as likely that Maori either support National or abstain on confidence and supply than that Winston Peters returns to Parliament with a block of seats for a Labour coalition.


Idiot/Savant said...

5. The participants in the market are idiots who bid on thebasis of partisan affiliation more than rational analysis of voter share.

But I guess that's just a less polite way of saying 1.

Crampton said...

i/s: Why would they only be doing that in the PM market and not in the VS market though? I can totally buy that partisan traders will make trades based on party affiliation. But why wouldn't they also be bidding up VOTE.NATIONAL or VOTE.ACT instead of just PM.NATIONAL? I don't see how that works.

Crampton said...

i/s: the prices now look close to right. See addendum, above. It also looks like a lot of weight is being put on Maori Party not opposing National, which makes the other prices make a lot more sense.