What outcomes are implied by the CA15PL.OTR contract?

Because payoffs in all of our markets must sum up to $1, there needs to be one contract that covers "all else". In some markets, as the popular vote share market, this is the share of the parties without a named contract, plus votes to independent candidates. In the majority government market, the "other" contract is covering the possibility of a "hung parliament" without clear majority—something that our traders are currently pricing as a high-probability event. But in the plurality market, the CA15PL.OTR contract covers only two remote possibilities: (a) that a fourth party (neither CPC, NDP, or LIB) wins a plurality of seats, or (b) that the two front runners gain the same number of seats in parliament—a tie. Neither of these events are impossible, but I think most observers would readily agree that such outcomes are highly unlikely. I think it is safe to discount the possibility that a fourth party eclipses either of the three large parties. This leaves the probability of the two front runners achieving the same number of seats. There is no "tie-breaker" in this event; it is the number of seats in parliament that counts and nothing else. Current bid and ask prices attribute a probability of 1.05–1.75% to this event. The literature on prediction markets is aware that prediction markets sometimes exhibit a "long-shot bias", which means overpricing contracts with low probabilities. However, with the popular vote shares of the major parties within a few percentage points of each other, the statistical probability of a "tie" may indeed be somewhere in the 1–2% range. If traders believe that there is a long-shot bias in the price of the CA15PL.OTR contract, these traders can take a short position against that contract. Only the election on October 19 will tell which traders are right and which traders are wrong. If you are curious about how to take a short position against a contract that you believe is overvalued, please read the section "Long and Short Positions" in the User Guide for Traders. Taking a short position in a prediction market is easy!

Posted Thursday, August 6, 2015 at 11:00