BetFair accurately predicted the direction of the interest rate change, but was too shy in its prediction of the amplitude of the interest rate change.

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BetFair predicted: -0,25

The Fed decided: -0.50

That’-s for the absolute accuracy. Now, what counts is the relative accuracy —-the comparison between the prediction made by BetFair and the predictions made by the financial markets experts. I see that the rate cut of 50bp has come up as a big surprise to the Wall Street pundits. For example, here’-s what Felix Salmon wrote this morning, before the Fed’-s meeting taking place in the afternoon:

But my gut feeling is that Bernanke should announce a nominal 25bp cut in the Fed funds rate to 5% (hell, it averaged 5% in August anyway) along with a more substantial 50bp or even 75bp cut in the discount rate.

An interesting comparison would be Felix Salmon vs. BetFair over the next 10 years. I bet that BetFair will beat Felix Salmon and the other Wall Street pundits, over the long term.

—-

The Federal Reserve’-s statement:

Release Date: September 18, 2007
For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman- Timothy F. Geithner, Vice Chairman- Charles L. Evans- Thomas M. Hoenig- Donald L. Kohn- Randall S. Kroszner- Frederic S. Mishkin- William Poole- Eric Rosengren- and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.

UPDATE:

BetFair predicted: -0,25

The Fed decided: -0.50

And, now, how did the economists fare? (Bloomberg link via Niall O’-Connor of Betting market, who has a comment.)

It was the first time in almost five years that the Fed move differed from analysts’- predictions. The half-point reduction in the federal funds target was forecast by 23 of 134 economists surveyed by Bloomberg News. One hundred and five predicted a reduction of 25 basis points, while six forecast no change. A basis point is one-hundredth of a percentage point.

- BetFair’-s probabilistic prediction: -0.25 @ 73%

- Bloomberg’-s probabilistic prediction: -0.25 @ 78%

So, BetFair’-s probabilistic prediction was close to Bloomberg’-s one. Neither better, nor worse.

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One thought on “BetFair accurately predicted the direction of the interest rate change, but was too shy in its prediction of the amplitude of the interest rate change.

  1. Niall O'Connor said:

    Chris

    Just be honest – they got it wrong; as did most of the so called experts;

    “The half-point reduction in the federal funds target was forecast by 23 of 134 economists surveyed by Bloomberg News. One hundred and five predicted a reduction of 25 basis points, while six forecast no change. A basis point is one-hundredth of a percentage point.”

    There is no real merit to be had from saying that they got the direction right. Moreover, in future it might be more worthwhile to also highlight what the so called experts do say, and, what the odds are on the spread and fixed odds markets regarding rate cuts.

    Only then will it be plausible to speak of the predictive intelligence of the so called prediction markets.

    It is also a pity that so many of the gambling industry funded academics who read this blog, do not focus on such matters and actually get around to producing some free, worthwhile research.

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