Risk Markets And Politics

• Demographics and Returns

  The intensification of the pension crisis provides a reason to re-examine the long-term effects of demographic shifts on underlying asset returns. Increased longevity has strained retirement system funding and this trend is unlikely to abate. At the same time, most asset prices have collapsed, but as the current bust becomes [...]
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  Posted: April 19, 2009, 9:48pm EDT
  

• The gold trade isn't too crowded yet

  The long gold trade isn't yet crowded because, although the pundits on CNBC have been capitulating over the past couple of months, it still seems like every other commentator has at least one of the following ideas, answered here.
  
  1) Gold is not a true commodity. It's largely [...]
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  Posted: February 01, 2009, 1:03pm EST
  

• Intrade offers an explanation of strange trading

  Intrade has made a statement on the unusual trading that many have noted and alleged to be manipulative. The statement suggests that the price action is mostly attributable to a single firm, a hedger "using our markets in good faith and in the ordinary course of their business."
  [...]
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  Posted: October 18, 2008, 12:55pm EDT
  

• The gamble of downplaying manipulation

  Whether it is GOP bias, manipulation, or simply confident well-funded traders, there is some agreement that the Intrade presidential markets have been affected by "non-informational" trading. To be clear, this is not a condemnation of Intrade. The exchange's liquidity and trader diversity are hamstrung by archaic laws in the' [...]
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  Posted: October 15, 2008, 11:02pm EDT
  

• Disneyland burned down

  Satyajit Das, in his 2006 book:
  Dealers on exchanges charge clients a fixed commission to trade; the cartel of dealers means that clients have no choice other than to deal through them. The dealers are fierce advocates of competition except where it affects them.
  
  In the OTC markets, [...]
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  Posted: October 13, 2008, 9:06pm EDT
  

• Regulated US election markets might not be so hard

  Based on the arguments Hedgestreet presented in its response to the CFTC on event markets, the exchange has a fairly strong justification to self-certify and begin trading election futures, soon. While most event markets trade as binary options, and the CFTC has flexible discretion over options per 7 U.S.C. [...]
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  Posted: August 03, 2008, 11:23am EDT
  

• My response to the CFTC on event contracts

  Here is my response to the CFTC's "Concept Release on the Appropriate Regulatory Treatment of Event Contracts." I appreciate this opportunity to help in working towards regulated prediction markets in the US, and I thank the Commissioners for it.
  
  Given the political implications of the rise' [...]
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  Posted: July 05, 2008, 12:05pm EDT
  

• The CFTC safe-harbor option for event markets

  The recommendation for safe-harbor of a group of influential economists to the CFTC aims squarely at the 4(c)3(K)* clause of the Commodity Exchange Act. The CFTC may approve a public interest exemption under 4(c) provided that the affected contracts are traded only between "appropriate persons". 4(c)3(K) is the only [...]
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  Posted: May 28, 2008, 9:03pm EDT
  

• CFTC regulation and election contracts

  Insofar as event markets are within the CFTC's jurisdiction, they would likely be approved as "excluded commodities". Here is the relevant part of the definition within the Commodity Exchange Act:
  
  (iv) an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or' [...]
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  Posted: May 26, 2008, 8:07pm EDT
  

• Foreseeable pathologies in political event markets

  Last Month, Marc Groz of Topos Capital graciously invited me to deliver a guest lecture to his class at NYU. The talk, "Measured Enthusiasm for Prediction Markets", was given to about 20 students. It introduced prediction and decision markets, then went off into tax and policy markets. As the [...]
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  Posted: May 26, 2008, 11:18am EDT
  

• Tax Futures TV appearance

  In February, I appeared on BNN, Canada's business channel, to discuss the tax futures that had recently launched on Intrade.
  
  One clarification: after some more careful research, the predominant factor test technically does not hold in New York State, although small-ante gambling participants are rarely prosecuted.
  [...]
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  Posted: May 26, 2008, 11:07am EDT
  

• Tax Futures, "In Real Life"

  I am very pleased to announce the world's first explicit tax futures on Intrade. I thank John Delaney and everyone there for their help and enthusiasm in getting these off the ground.
  
  The contracts will forecast the highest marginal single-filer federal tax rates for 2009, 2010 &' [...]
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  Posted: February 06, 2008, 11:55pm EST
  

• Policy Event Derivatives

  The essential purpose here is to advance the ideas of public policy markets and tax futures. To this end, we can once again show that such markets help to address well-known problems that arise in government.
  
  Consider the typical "special interest" problem as described in public choice economics. A [...]
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  Posted: May 22, 2007, 9:36pm EDT
  

• Tax futures and the libertarian paradox

  The libertarian paradox whereby free markets spur wealth creation which in turn supports the growth of the state suggests a potential issue with tax futures. Tax futures are hedging markets that predict future tax rates and could trade alongside more specific policy event derivatives. Such markets are naturally [...]
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  Posted: March 22, 2007, 8:49pm EDT
  

• Non-obstacles to CFTC-regulated political event derivatives

  Now that the CFTC has effectively begun regulating event derivatives, what obstacles might lie in the way of a DCM-hosted election market? Is there now greater ambiguity between futures trading and legal gambling? After all, couldn't a game of roulette be described as an event option? (I see no current' [...]
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  Posted: February 10, 2007, 2:44pm EST
  

• Legal "prediction markets", sooner than you think.

  This month continues to see consensus build that "prediction markets" ought to be regulated by the Commodity Futures Trading Commission. It is quite possible that the CFTC will approve CME's Credit Event Futures on Wednesday, signaling the legal way ahead for other "event futures" in the US.
  
  Richard' [...]
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  Posted: January 29, 2007, 9:49pm EST
  

• Aloha, Poker Players Alliance

  As more prediction market enthusiasts in the U.S. reconcile themselves with eventual CFTC regulation, the Poker Players Alliance is making a bid to join the ranks of the privileged exemptions to UIGEA. Prediction markets have simply not been profitable enough to support a national lobby for a similar [...]
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  Posted: January 24, 2007, 8:57pm EST
  

• The LindeX Currency Exchange

  In the wake of the Neteller arrests this week, alternate currencies are unfortunately a bit less interesting. While the DOJ has not yet moved against gambling in virtual worlds such as Second Life, it is only a matter of time now. When the UIGEA was passed, a person [...]
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  Posted: January 20, 2007, 6:27pm EST
  

• Yootle interest rates and inflation

  There is some excitement around Yahoo's planned "Yootles" currency and group decision-making mechanism. Near the end of the above paper, one sees that the initial interest rate for Yootles will be set to 5.375%. This strangely precise level is 1/8th of a percent higher than' [...]
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  Posted: January 08, 2007, 8:10pm EST
  

• HP and corporate prediction markets mechanisms

  Leslie Fine's announcement that HP had signed with Pfizer to deploy an "information gathering tool" could mark a turn for corporate prediction market consultants, regardless of nomenclature. Pfizer had enough internal resources to build their own prediction markets, and ran them for about a year. As Leslie tells it,' [...]
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  Posted: January 08, 2007, 7:10pm EST
  

• NYMEX to launch Property Damage Risk Futures

  The New York Mercantile Exchange today announced that it intends to list Property Damage Risk contracts based on Gallagher Re's planned "Re-Ex Index", which will track losses due to catastrophes, defined as events causing more than $25 million in damages by ISO's Property Claims Services®.
  
  The [...]
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  Posted: December 14, 2006, 7:57pm EST
  

• Flora of North America (CFTC regulation again)

  Tom Bell argues that the CFTC does not have authority over event and prediction markets. At the core of his argument is the definition of commodities subject to CFTC jurisdiction in the CEA: "all services, rights, and interests in which" [...]
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  Posted: December 14, 2006, 7:51pm EST
  

• Credit Event Futures and other fauna

  Let's reorient ourselves towards the regulatory environment that potentially affects the evolution of prediction markets.
  
  First, is the Chicago Mercantile Exchange's planned Credit Event Future within the jurisdiction of the CFTC? The Chicago Board Options Exchange protests that it is not. CME's initial defense reduces the issue' [...]
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  Posted: December 13, 2006, 6:47pm EST
  

• Is the hedging economic purpose test ambiguous?

  Apropos of Andrew Gelman's comments on the questionable benefits of betting markets, if insurance can be understood as reducing variance in wealth, consider the effect of diversification at the portfolio level. Uncorrelated assets such as those attached to political events, weather, sports or even poker hands could' [...]
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  Posted: December 13, 2006, 6:42pm EST
  

• Economic Derivatives Auction trader motivations

  The National Association for Business Economics' experimental auction data for the October payrolls release seems to be unavailable, but let's compare their forecasts to CME's economic derivatives auction for the September release.
  
  NABE:
  
  
  CME:
  
  
  The' [...]
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  Posted: December 13, 2006, 6:31pm EST
  

• Discounting and prediction market prices

  The prolific Alex Forshaw asks why 2008.GOP.NOM.HUCKABEE trades above 7. But should you sell even an impossible event for less than 100-(100/((1+(r-rm))^T)+ c? Here, T is the years to expiration, r the risk-free rate, rm the yield on your margin (which is zero for most Intrade traders), and [...]
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  Posted: November 26, 2006, 1:25pm EST
  

• Political Factor Analysis

  David Pennock, Lance Fortnow and others on " target="_blank">Marginal Revolution and DailyKos explain the "failure" of prediction markets for Senate control as stemming from the assumption that state-level elections are independent events, an assumption that ignores national movements in sentiment.
  
  Is there a way to [...]
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  Posted: November 12, 2006, 11:19pm EST
  

• The Bottom-up Approach to Legal Prediction Markets

  As hoped, the gambling crackdown is beginning to energize efforts that will eventually lead to legal prediction markets in the United States. As expected, some call for CFTC regulation, while others would prefer an exemption of the kind currently protecting horse-racing and fantasy sports, while libertarians tend to [...]
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  Posted: October 15, 2006, 11:02pm EDT
  

• "All the iridescence of the beginning of the world"

  The World Economic Forum dropped the United States from first to sixth place in the 2006-7 Global Competitiveness Report, released on September 26th. As Dave Altig points-out, America still holds the top position in microeconomic efficiency, and its downgrade results from its suggestively ominous yet difficult-to-interpret macroeconomic position. [...]
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  Posted: October 09, 2006, 12:44am EDT
  

• The "top" of the anti-gambling movement?

  In the oh-so-very important crusade against internet gambling, Republican law-makers, led by Bill Frist and Jon Kyl, scrambled to include a version of the Unlawful Internet Gambling Enforcement Act in the Safe Port Act as the clock approached midnight on Friday. Ostensibly a defeat for proponents of online speculative [...]
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  Posted: October 01, 2006, 5:39pm EDT
  

• The State of Louisiana vs. X: Put my money on X

  Or behind X, where internet gambling is concerned, at least. A few months ago I wrote that, "it may take an attempted crackdown to galvanize support for online gambling in the US."
  
  Well, we may be getting there.
  
  Adding to its singular accomplishments, the great State of [...]
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  Posted: September 27, 2006, 10:28pm EDT
  

• Nymex: "Evolution is Inevitable"

  Nymex seatholders have for some time been contemplating the value of their trading rights versus the equity value in the eventually public exchange. On September 4th, Nymex will begin offering physically settled electronic energy futures. Although it was known to be in the works, this announcement is significant and [...]
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  Posted: August 23, 2006, 12:06am EDT
  

• Why we don't have tax futures

  I was encouraged by the comments when Tyler Cowen linked to my last post on tax futures. There is, unfortunately, an obstacle that wasn't touched on. Tax futures would have a tremendous hedging utility and would therefore likely fall under the jurisdiction of the CFTC. The CFTC must [...]
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  Posted: August 12, 2006, 1:49pm EDT
  

• On "Digital Maoism"

  It's difficult to boil-down Jaron Lanier's essay on the limits of online "collectives", but these are the most salient points:
  
  

  • Collectives are stagnant and threaten to smother the voice of genius by enshrining consensus. Genius and creativity will naturally not correspond to average opinions.
  • Collectives are too volatile and [...]
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  Posted: August 09, 2006, 10:02pm EDT
  

• Random laws and real-money market possibilities

  A few weeks ago, I hinted about possible strategies available to US-based firms seeking to operate "hybrid" real-money markets. What I had in mind was the example of Sony's EverQuest and other MMORPGs where virtual game items are sold in secondary online markets for real-money. Such examples [...]
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  Posted: July 24, 2006, 11:36pm EDT
  

• Self-interest under the guise of morality

  From Gambling and Speculation, which should be on the bookshelf of anyone concerned with overcoming the obstacles to financial innovation:
  

  In 1776 all public lotteries were consolidated in the Loterie Royale modeled on the very successful Lottery of the Roman States sponsored by the pope, and all private lotteries [...]

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  Posted: July 24, 2006, 12:38am EDT
  

• You heard it here first. Well, not really...

  On July 11th of last year , I observed that:

  As VIX [the US equity implied volatility index] makes new multi-year lows, David Merkel at RealMoney [$] notes: "many investors have become yield hogs, and have sold puts and calls to increase income in a tough environment. This is [...]

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  Posted: July 09, 2006, 9:45pm EDT