What is the biggest uncovered risk category, and how would you hedge it?

Jason Ruspini:

While when proposing new markets, “speculators” is often a pat answer when there are no obvious counter-hedgers, we know that hedge funds and others are looking for capacity, and there are many examples of possible legislative markets where there are natural counter-hedgers. In your example just replace “tax” with “subsidy” and suddenly every other tax-payer has an implied risk.

Now it is true that those dispersed interests won’t suddenly coalesce when such markets are introduced, but they will be in a better situation than they were before the market was in place. Also, a large trader may end-up with a position in alignment with taxpayers’ interests, which might lead to lobbying for the presumably more efficient outcome. I don’t really see these markets as ending lobbying. One of their drawbacks is that they may actually increase the demand for new legislation (as opposed to hedging against bills already in the pipe). I’m comfortable discussing these potential issues though — that’s the most productive thing that can happen at this stage.

Also Jerry, there are really no public contracts like we are discussing. Intrade’s social security private account contract of a couple years ago is the closest thing that comes to mind, and of course election contracts which serve the same general purpose though with vastly more basis risk.