Stan Jonas (DutchBook Partners) to me:
This chart captures (tick by tick) the “arbitrageable” probabilities of perhaps the most popular “bet” traded: the probability that the FED will move 50 basis points (i.e. twice) by the January 2008 FOMC. As in the market convention, probabilities of > 100% say 125% are to be read as 25% probability that the FED will move more than 50 basis points by the January FOMC.
The last two weeks have been a milestone, in many ways. But for prediction markets, it’s been a valedictory. As of November 20th, the Central Bank, our FED, began to release their forecasts, so to speak as to the probability of their own movements —joining the Central Banks of Sweden and Norway, and of course the Bank of England.
Markets are now quoted in terms of probabilities. Press commentary is geared to expressing the “probabilities of the FED’s next move. Etc. Central bankers respond directly to the probabilities embedded in the marketplace.
Transparency is now operationally defined as the “probabilities” in the market as traded corresponding to the path as forecast by the Central Bank.
With its offshoot the EuroDollar futures market, these probability markets are the most liquid in the world (bar none), with not only plain vanilla bet… compound booleans. i.e. What is the contingent probability of the FED no going in December but Going in January. What is the probability of not a 25 basis point move, but a 50 basis move at any of the meetings… and the higher moments, with options on the already ‘digital options trading.
