The market moved but is it news?

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In financial markets there is strong evidence to suggest that news gets priced into markets within 15 minutes of its release and sometimes even more quickly. Recent research into prediction markets suggests that they aren’t nearly as efficient with researchers from University of Pennsylvania showing that prices on IEM can be predicted using public news flow.

Doing a simple analysis of some the key events in the 2008 Presidential Elections against prices on Intrade shows that on discrete events there is a clear relationship between prices and news flow. However over longer periods the relationship is not always clear.

On the 4th of March CBS announced the results of a straw poll conducted at the conservative PAC convention in Washington DC. They picked Romney as their favourite. Romney’s price on Intrade lifted immediately where it stayed for about a week.

Romney price

On the 11th of April the Fred Thompson revealed on Fox News and ABC Radio that he had been diagnosed with non-Hodgkin’s lymphoma nearly three years prior. The New York Times and other publications picked up the story the next day. Looking at his price chart shows he opened on the 12th of April at 19 but then closed at 15. The next day he opened at 11.2 but then closed at 17, as the story died down.

Thompson price

In both these cases, the news stories the media considered to be the important ones correspond with the news flow that traders thought was important.

However, the most interesting market movement of the year must be the Obama August slide. On the first of August Obama opened on Intrade at 35.5 but by the 24th of that month he had slide to 17.2. He continued sliding hitting a rock bottom of 10.7 on the 14th of October.

Obama price

The question is what was the news flow on Obama from the 1st of August to the 24th of August? Analysing the news articles in the New York Times suggests a disconnect between what was reported and how the market was reacting. Obama started August badly with a bungled comment on use of nuclear weapons.

Additionally, his continued line that stabilisation of Iraq had been a ‘complete failure’ may also have cost him some points.

However in sum these news items don’t seem to correlate with an 18 point slide. This could lead us to two possible conclusions:

  1. The New York Times didn’t report the most market sensitive news affecting Obama in August
  2. Obama was over-sold in August and his price did not reflect his true value

Cross-posted from the Hubdub blog.

3 thoughts on “The market moved but is it news?

  1. Jason Ruspini said:

    In this case it was #2. A margin change at Intrade forced some leveraged long Obama traders out of their positions. These markets are still illiquid enough that if I were willing to maintain an interest-earning Intrade account, this would not have played out the same in August and the whole situation is regrettable.

    So it’s more that there was something in the price that wasn’t information (according to your assumed interpretation of the price) than information being missing from the price.

  2. Chris. F. Masse said:

    The way to infirm or confirm Jason Ruspini’s hypothesis is to compare InTrade historical prices with BetFair ones. In the coming weeks, I will publish a bit about that issue.

  3. Jason Ruspini said:

    Whatever the data from the less liquid market shows, my “hypothesis” also explains the volume surge on August 21st-22nd, one week after margin rates for long-term nomination contracts officially tripled. In terms of high-volume days over the history of the Obama nomination market, those days rank #1 & 2 and saw more volume than the preceding 74 days combined.

    Although Obama had been sliding since the Castro comment in late July – what looks like a pretty clear catalyst in retrospect – it was this last burst of volume that sent the contract down into the mid-teens and prompted Dylan Ratigan on CNBC to say, explicitly referring to an Intrade chart, “So basically Obama is down the toilet.. poof.. see ya”, on the August 22nd “Fast Money”.

    Clinton and most other nomination contracts also saw large spikes in volume that week. Giuliani’s contract didn’t have a volume spike – but margin changes might also explain the unusual volume patterns that I talked about in March.

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