Friday, November 7, 2008

Morning update

At current prices in the VS markets, and subbing in Ron Mark's chances in his electorate rather than Peters's chances (as either is sufficient for NZ First to return), PM.National is currently substantially underpriced. Only two unlikely potential Parliamentary configurations yield PM.National probabilities under 80%: if NZ First returns and the Maori Party supports Labour, PM.National would be at 75%; if ACT also doesn't return, that probability drops to 19%. The most likely scenario is:
NZ First0

The above gives us a 122 seat Parliament and a 65 seat Act-National-UF coalition governing handily, with or without Maori Party support.

Unless prices elsewhere in the system are out, and they don't look out to me, National's a strong buy at anything less than 90%. The spreadsheet's telling me 97.5% chance of a National coalition government, but I'm not confident enough in it to go above 90. Full disclosure: I'm current high bidder on PM.National and have substantial position long PM.National and short PM.Labour.

63 of you have downloaded the spreadsheet to play with: any thoughts on it?

Yesterday saw some interesting trading on MP.Peters: what looked like a couple of attempts to drive the price up, or a strong Peters partisan hastily trying to build position, or somebody with inside info about Ron Mark's chances of winning his seat. We now have a market on whether Ron Mark will take his seat, and that's saying 6.1% chance that he does. Is there really a 10% chance that NZ First beats 5%?

Addendum It's happened again. Somebody's run the MP.Peters price up from 0.16 to 0.20; it's now back down again to 0.1825. Why do I think one trade? Because it happened between quick refreshes of my browser window! If this were somebody trading on fundamentals, we'd see movements in Rimutaka.Mark or in Tauranga.Peters or in VOTE.NZFirst. I suppose it's possible that somebody's making this play figuring that the true standard deviation of the minor party stocks is more like 1.1 than 0.9, but just ramming the price up seems an odd way of going about things. Recommendation: if you think that the fair price of MP.Peters is below $0.18, throw some asks into the order book above $0.18 in case our Peters fan returns!


Anonymous said...

Hi, where can I get this spreadsheet? Sounds like a good tool?

Crampton said...

It's at the prior post here.

Anonymous said...

Any views on what majority.NAT should be trading at given the other prices?

Crampton said...

Not really. On the one side, I'd expect it to be increasing with the increase in VOTE.NATIONAL; on the other side, the variance of our estimates of VOTE.NATIONAL ought to be decreasing as we get closer to the election and more uncertainty is resolved. The first pushes up MAJ.NAT; the second pushes it down.

I suppose one could work backwards from prices in PM.NAT to try and work out what MAJ.Nat should be given other prices, but that's massively more complicated than working the other way round.

Bottom line would be the following: at current prices, the implied standard deviation of National's expected number of seats is 1.74 (standard deviation 1.32). That means that National is expected to get 60 seats, but our 95% confidence interval is 56.4 to 63.6 seats. If you think that the confidence interval should be narrower than that, then MAJ.Nat is overpriced; if you think that the confidence interval should be wider than that, MAJ.National is underpriced.

Greg said...

In a 122-seat House (which seems to be the most likely in my view), National would need 62 seats for a majority and correspondingly a vote share that is a few points higher than they currently have.

A 121-seat House would need 61 seats for a majority - still a few seats too high for National by themselves (again, in my opinion only; I haven't done an extensive analysis of the numbers for a while).

Remember it is majority of seats, not majority of party votes, that we are judging here. More difficult to achieve with every overhang seat.

Full disclosure: plenty short on MAJ.Nat.

Crampton said...

Greg: 60 seats definitely isn't a majority in a 122 seat Parliament. My numbers are based on a 122-seat Parliament. If you think it's more than 5% likely that National's realized seat share falls outside of the 56.4-63.6 range (either 56 seats or 64 seats), then Majority.National is priced too low. If you think it's less than 5% likely that the realized seat share falls outside that range, then majority.national is priced too high.

Full disclosure: I have no position at all on Majority.National because the 95% confidence interval looks about right to me!

Greg said...

I'd actually be inclined to say that the VS for Nat is a shade too high - even at the current 48%.

A rough calculation I'm using is that 62 seats in a 122-seat House would require 51.6% of the party vote (after Sainte-Laguë redistributions). Given every poll of late - and not just iPredict prices - I would rate that as being outside the 95% certainty.

Crampton said...

PM.National's price is more consistent with VOTE.NATIONAL at 47.5 than at 48, I'll agree.