Recession Contract Proposal

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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!

3 thoughts on “Recession Contract Proposal

  1. Jason Ruspini said:

    GDPQ2 > GDPQ3 for instance.

    And if it won’t be settled until the final number, traders will need to be paid interest on their “frozen funds”.

  2. Caveat Bettor said:

    Jason: That is an interesting thought–are you basically suggesting a parlay structure of 2 consecutive quarterly GDP numbers?

    As far as getting paid interest, I think we are a generation away from that. Remember, your dad had to pay $200 back in the 70s to execute a few hundred shares of stock. Until we see more liquidity and competition on these information futures exchanges, the intermediaries will not be compelled to pay interest.

  3. Jason Ruspini said:

    I didn’t have any particular propositions in mind. In order to bet on a recession, if the current prices are GDPQ1 = GDPQ2 = GDPQ3, you would just sell GDPQ2 and more GDPQ3. This setup won’t give a straightforward % chance of recession number, and it will be harder to lever than an explicit recession contract.. although this would be an index/scaled claim that wouldn’t require 100% margin.

    I agree on the interest point although I don’t think it is quite so far off. Shiller’s new macroshares happily pass through interest, btw.

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