Comments on: Shorting on Prediction Markets http://www.midasoracle.org/2007/08/28/shorting-on-prediction-markets/ Prediction Markets, etc. Thu, 02 Feb 2012 23:13:18 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Byrne Hobart http://www.midasoracle.org/2007/08/28/shorting-on-prediction-markets/#comment-16114 Byrne Hobart Tue, 28 Aug 2007 13:32:08 +0000 http://www.midasoracle.org/2007/08/28/shorting-on-prediction-markets/#comment-16114 Most prediction markets are still binary: you can bet on whether or not X will happen. You could do real shorting once we have continuous markets (betting on the future magnitude of Y -- not "Hillary will be President; $1.00 if so, $0, if not," but "The economy's growth will be higher under a Hillary Presidency than under a Bush Presidency; $1.00/percentage point increase in GDP growth.") Some stocks have a similar situation to what you're describing. When an airline is involved in a labor dispute, for example, the stock stops behaving like it measures a stream of cash flows, and starts acting like it measures either a) the same stream, or b) nothing, because the company will go bankrupt. At that point, the only bets you can make are "Strike resolved" or "Strike not resolved," unless you do something complicated with fixed income. Most prediction markets are still binary: you can bet on whether or not X will happen. You could do real shorting once we have continuous markets (betting on the future magnitude of Y — not “Hillary will be President; $1.00 if so, $0, if not,” but “The economy’s growth will be higher under a Hillary Presidency than under a Bush Presidency; $1.00/percentage point increase in GDP growth.”)

Some stocks have a similar situation to what you’re describing. When an airline is involved in a labor dispute, for example, the stock stops behaving like it measures a stream of cash flows, and starts acting like it measures either a) the same stream, or b) nothing, because the company will go bankrupt. At that point, the only bets you can make are “Strike resolved” or “Strike not resolved,” unless you do something complicated with fixed income.

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