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 Presidential Arbitrage and the 2004 Election The inventors of the statistical algorithms behind the PQ Index* have uncovered a risk free pre-election profit opportunity they coined Presidential Arbitrage. In recent months, several online idea futures exchanges and sports betting venues have been quoting odds to the 2004 Presidential elections. Participants in one exchange are often unaware that a very similar product is traded in another exchange. And while these real-life derivatives products exhibit a strong mathematical relationships, this is often overlooked by the exchange participants because the products are named differently or exhibit slightly different payout structures. In some cases, it is even possible to derive profits within a single exchange. Case in point is InTrade.com -- a U.K.-based online exchange. InTrade offers both a Bush contract and a Kerry contract. Each contract pays 100.0 points ($10.0) if the respective candidate wins and 0.0 if the candidate loses the election. Of course, the probability P(K) of Kerry winning the election is 1-P(B), that is to say, one minus the probability of Bush winning the election (of course, assuming these are the only two candidates who can actually win). Therefore, these contracts are actually equivalent and the quotes should reflect this fact. However, earlier this week, the Bush contract was quoted at 52.1 - 52.2, whereas the Kerry contract was quoted at 45.0 - 46.0. This means exchange participants could have bought one Bush contract and one Kerry contract for a total of 52.2 + 46.0 = 98.2, knowing that this portfolio would be worth 100.0 one week later, regardless of who wins the election, that is, risk free. While this doesn't sound like much of a profit, it represents an annualized return that significantly exceeds that of any popular financial index. However, before mortgaging your house in an attempt to profit from these inefficiencies it should be pointed out that the liquidity in these online exchanges is miniscule. This introduces pricing problems and opens the door for various forms of market manipulation. Therefore, while profits can be derived from Presidential Arbitrage, casting your vote will likely have a bigger impact on your family's economic future. | |
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25 of october Profiting from U.S. presidential elections might just be the ultimate form of democratic capitalism. So when the media spin surrounding the 2004 elections started gaining momentum, I decided to join the politically inspired pollsters and bumper sticker peddlers in finding and exploiting the inefficiencies resulting from predicting election results. I suppose it should not have been surprising that the time tested Arbitrage Pricing Theorem was equally applicable in the political arena...