One question that often comes up is how to encourage participation in long-term, multi-year event markets. This issue is closely linked to cost of capital, and even play-money markets have opportunity costs and discount rates.
If the outcome is revealed gradually, as with questions about the global climate, offering a series of short-term levered contracts should help. This is not entirely satisfying though because it could be viewed as just increasing the noise in traders’- p&-l —- although the traders with correct long-term views will do well, and the greater magnitude of the p&-l will attract more traders and keep them interested in the market.
There is just no way to settle a contract today for an event that will happen tomorrow. The most important thing you can do is to minimize the capital required to be committed to the distant event. For instance, traders may be compelled to only post or freeze a fraction of their worst-case loss, although this gets tricky if the contract will likely be resolved in a sudden, drastic jump. In this respect, questions about the climate are more tractable than ones concerning technological breakthroughs, for example. In many cases it may be better to use index futures instead of a binary options.
Most importantly perhaps, remember that most of what “-prediction”- markets do is just aggregating and discounting current information. Therefore ask yourself if anyone feasibly possesses information pertinent to the distant event. There may be nothing to aggregate. It may still be worthwhile to set-up a market because you’-re not sure when someone will learn something relevant, but it is probably undesirable to try to force participation, even for very important questions.
Read the previous blog posts by Jason Ruspini:
- 2009 tax futures yielding 1.5%
- Intrade, with carry
- Talking tax futures on BNN, Canada’s business channel
- Tax Futures, “In Real Life”
- How to sell art short
- YooNew, fears and hopes
- Policy Event Derivatives
