A few days ago, I came across Chris&#8217-s question concerning recession prediction:

My Question: How would you structure a US recession prediction market? (…without splitting liquidity, I mean.)

My initial response to this was:

A recession is defined as two consecutive declines in real GDP. Why not create a series of contracts, as follows:

US.RECESSION.4Q06.1Q07
US.RECESSION.1Q07.2Q07
US.RECESSION.2Q07.3Q07
…

Here are some more of the contract details:

The Expiry Price will be 100 if Real GDP declines for two consecutive quarters, and 0 if Real GDP does not decline for two consecutive quarters. Final Real GDP figures (3 months after quarter end) will be used, not the advance (one month after) or preliminary (two months after) Real GDP numbers.
The Result used to determine the expiry prices will be the official figures released by Bureau of Economic Analysis, an agency of the US Dept of Commerce.

Comments welcome and appreciated!

Rationalization of the HRC attack

Since it seems that I won&#8217-t secure any more capital on which to exploit this within the relevant timeframe, I thought I&#8217-d complete the circle regarding the HRC attack of several days ago. (For the first half of the analysis, please read this post.)

The attack was clearly &#8220-irrational&#8221- and not related to release of any public information&#8211-if not directly contrary to that day&#8217-s information. A buyer with the sophistication of knowing the publicity power of Tradesports stats, who had learned a key piece of inside information, would have bought Hillarys much more gradually, saving himself significant dollars. However, we already established that no piece of private information could realistically justify the movement from 54.5% to 68.5%. It seems clear that the attack was &#8220-irrational.&#8221- But if every event is caused by something, what would cause this attack?

My answer: someone internal to the &#8220-Run, HRC, run&#8221- decision process wants Hillary to run, and is searching for other factors with which to convince her that she will run. So that someone, my guess is a senior staffer with some money lying around, did this so that s/he could go to Hillary and, having gone over the latest poll numbers, say, &#8220-Oh, by the way, the market numbers [which are so impartial, of course] on your likelihood of getting the nomination are&#8230-&#8221- And 68.5% sounds a lot better than 54.5%. The staffer probably knew it would go down pretty quickly, but it did happen, so it&#8217-s not a lie, even though the meaning was totally deceptive. And as the attack occurred at about 6 AM Eastern, it would be just in time for the morning briefing! (Yeah, that might be trying to tease too much out of the inference. Who knows. Right?)

Hillary is reading the tea leaves, sees her high negatives, sees her perceived and actual huge baggage, and is feeling hesitant about the whole idea. The final go-ahead to her big donors will happen sometime in December. I am sure that someone is staking big bucks trying to convince her to run. Probably a senior staffer who has a ton to gain personally and career-wise, if Hillary goes all-out. And Hillary is a lot more skittish than 55% skittish.

Addendum, again from Hotline: FNC&#8217-s Cameron: &#8220-The chairman of Iowa&#8217-s Democratic party told Fox News that Mrs. Clinton has not been adequately laying the groundwork for her campaign and that first in the nation caucus goers are being told she may not run because of growing buzz over Illinois Freshman Senator Barack Obama&#8217-s expected candidacy.&#8221-

The plan was for Iowa Gov. Tom Vilsack to be the stalking-horse for the Iowa caucuses, and render it irrelevant. The Iowa primaries are about retail politicking, which Hillary hates. Unfortunately for Hillary, Vilsack&#8217-s polling has been dismal, even in his home state. Which renders his run all the more irrelevant, and irrational, without ulterior motives.

Scenarios for possible breakup of the European Union have been a lively discussion topic for years. So far the EU is holding together but the possibility of some kind of radical restructuring is always in the background. With the help of a couple of people who may wish to join this conversation, I hope to create prediction markets that produce reasonable probability estimates for various EU events including complete breakdown. These will not be real-money markets but I think they will be useful nonetheless. The purpose of this blog post is to solicit suggestions on how to frame EU breakup (i.e., which tradable propositions or bundle of tradable propositions should we make available to traders) and on the specific contract specifications to use in such prediction markets.

There are at least two difficult issues: 1) defining the time horizon (expiration date) for each contract and 2) defining the criteria for EU failure. Time horizon is tricky from a liquidity perspective, because the plausible failure scenarios all occur at least a couple of years from now- traders usually prefer shorter-term contracts. WRT the other issue, failure criteria, how would we define EU failure? Would it be:

– Germany/France formally withdraws by date X?

– Germany/France resumes use of its own currency by date X?

– X nations formally withdraw?

– Value of the Euro declines below some fraction of the USD?

– UK/other country does not adopt Euro currency by date X?

– Euro currency removed from circulation?

– Repeal of acquis communautaire?

– Formal end of the EU?

– Something else?

So we might have a series of contracts along the lines of, &#8220-German govt formally withdraws from EU by 31 Dec. 2010 [2011, 2012, 2013, . . .]&#8221-

Or we might have a range of contracts (German formal withdrawal, French formal withdrawal, UK non-adoption, etc.). IOW, instead of defining EU failure as a discrete event, we provide contracts on multiple scenarios and traders bet on whichever basket of scenarios they prefer. This approach makes more sense to me than would an attempt to define &#8220-EU failure&#8221- as a single event.

Based on suggestions I&#8217-ve already received, I think the following contracts might make sense:

– Next country to drop out. There would be one such contract, with no expiration date, for each country. All contracts expire when one country drops out (expiration value would be 100 for that country and 0 for the other countries), and would be automatically recreated for the remaining countries. There would have to be a contract provision to handle simultaneous withdrawal by multiple countries, but that shouldn&#8217-t be difficult. And of course withdrawal must be defined precisely.

– Country X adopts/rejects single currency by 31 Dec. 20XX. (Again, &#8220-adopts&#8221- or &#8220-rejects&#8221- must be defined.)

– Germany/France + one other country are last remaining EU members on 31 Dec. 20XX. (&#8221-EU member&#8221- must be defined.)

– Euro currency removed from circulation by 31 Dec. 20XX.

But the above contract ideas are merely first efforts.

How would you define EU failure for contract purposes? What kinds of contracts would you like to see? How to make such long-term contracts appealing to traders?

I much appreciate any suggestions. Thanks.