Some think the US could have a balanced budget by 2008. If tax rates and economic growth rates remain unchanged, I would buy the 2008 contract in size.

If the Democrats roll back the capital gains and dividend tax cuts, then I would sell a little 2008.

Cross-posted from CaveatBettor.

Previous blog posts by Caveat Bettor:

• Land-Ocean year-to-date temperatures 0.35 Celsius over baseline
• Final InTrade v. Zogby Showdown Results
• Intrade lists Global Warming Contracts!
• Intrade beats Zogby on Super Tuesday
• Super Tuesday Showdown: Intrade v. Zogby
• The Democrat SC Showdown: Intrade v. Zogby
• Zogby beats Intrade in predicting Nevada caucus winner Clinton.

Tangentially related to the recurring long-term prediction markets discussion, I noticed at Economic Housing Derivatives that TFS London has launched a &#8220-Future House Price Index&#8221- extending to 2030.

A Reuters article says New indexes see UK house prices doubling by 2030:

The aim of the TFS FHP series of indexes, calculated using over-the-counter swaps based on the Halifax house price index (HPI) and traded by banks, was to raise the profile of British house price derivatives by expressing market expectations in more easily understandable terms.

I&#8217-m not at all certain whether banks are trading securities that expire in 2030 or this index is pure extrapolation. And despite the sensational &#8220-doubling&#8221- headline, the numbers (see the Economic Housing Derivatives post) seem to indicate a 2.7% annual increase, presumably not much above expected inflation.

CME housing futures go out no further than one year.

Something interesting, or move along?

Correction: The blog cited is called Housing Derivatives, not Economic Derivatives.

For now, prediction markets are mostly used for short- or mid-term prognosis horizons.

The pay-off for the traders is contingent upon the real event. That means they have to wait until the actual event occurs, before they know what their prognosis is worth and what the pay-off for each contract is.

What about long-term events?

For long-term prediction, this doesn’t seem to be a practicable way. Waiting till 2020 when e.g. the real unemployment rate is published does not provide an incentive to trade shares for this.

But what could be a way to construe a reasonable pay-off function?

One possible approach by Prof. Spann at the University of Passau is to run two separate prediction markets concurrently. All information about prices, traders etc. of market A would not available for traders of market B and contrary.

The pay-off for Market A would be the final price of Market B and vice versa.

So it is possible to run an virtual market for e.g. 2 months predicting the outcome of an event in 2020.Another way is to let an expert(s) assess the event an use his (their) opinions as the pay-off function.

Furthermore the own end-price of the market could be the pay-off. But then manipulation is to be expected.
I&#8217-m looking forward to discuss this challenge with you!

P.S. www.Ideosphere.com seems to be a prediction market for long term predictions, but they don’t provide a solution for the problem.