Political stock market punditry

by Daniel on August 27, 2008

Why are people selling the Obama WTA contract into the convention? The “convention pop” is a pretty well-established phenomenon in the polls and is visible in IEM data from previous races too. Added to that, Obama is pretty well-known for being good at set-piece speeches. All I can find in the pundosphere is a suggestion that Hillary Clinton might steal Obama’s thunder, but this seems pretty weak beer to me. Any theories, or is there a genuine short-term trading opportunity here?



belle le triste 08.27.08 at 9:27 am

daniel i am a dunce with economics, so this post may be totally O/T or it may cleverly lead to the answer to your question, i don’t know, but can you spare a glance to pick the bones for me out of the following viz:

this this very wonky look at the promising particulars of obanomics (warning: may need registration) vs parts one and two of stirling newberry’s ultra-bearish jeremaid here (part one) and here (part two)

(anyone wanting to argue newberry is a dunce too plz to provide reasons thx bye)

(and if this is too outrageous a threadjack apologies and ignore — but it sames sorta kinda potentially germane to me) (translation: i didn’t know where else to ask your opinion)


Brian 08.27.08 at 9:45 am

I think a lot of people had formed the view that the VP announcement pop was more significant than the convention pop. But the first polls after the VP announcement were bad for Obama.

My guess is that this is just noise and that the contract will go up a fair bit in upcoming days, so I agree there is an opportunity here.


ShaunR 08.27.08 at 9:47 am

Thin volumes, I think. Between close on the 25th and the 26th it took a trade of 714 units to move Obama’s price from 0.605 to 0.555. A unit is valued at $1.
Obama’s been no higher than 0.635 in August.


Brian 08.27.08 at 9:55 am

OTOH, if you have a large enough capital base, there is a much simpler trading opportunity on InTrade. The sell prices of the Republican VP candidates sum to about 125. If the transaction fees can be sufficiently lowered, it’s a simple arbitrage opportunity.


Kevin Donoghue 08.27.08 at 10:38 am

Is this a very thin market? I know nowt about WTA but I looked at Intrade just now and the spread is 59.4-62.5 for just 10 and 2 contracts respectively. Anyway 60 seems to me a pretty steep price for a candidate who is a lot more vulnerable to dog-whistling and negative campaigning generally than John Kerry was, even if he is pretty good at counterpunching. It’s puzzling to hear so much talk about McCain coming back while his price struggles to break 40.


Matt McIrvin 08.27.08 at 12:12 pm

The convention pop happens frequently but it doesn’t always happen. The buzz on CNN early in the convention was all pushing the Clinton/Obama antagonism story and seeking out PUMAs. A lot of people may have decided from that that the convention’s going to be a bust this time. And it may well be.

Long-term, I’m increasingly pessimistic. The crucial voting bloc in America is frightened, low-information white 75-year-olds. It’s a really close race, just like the last two presidential elections, and Obama’s vaunted GOTV operation isn’t going to have much effect on the customer base for robot insurance. If I played this game I think I’d buy McCain.


abb1 08.27.08 at 12:58 pm

Yesterday’s Gallup daily tracking has McCain 46%, Obama 44%.


Black Political Analysis 08.27.08 at 1:37 pm

To me it seems like a case of unrealistic expectations. Once you’re the presumed front-runner and have a bad day (or week) then the scuttlebutt is you cannot meet expectations. But, after 2000 and 2004 when the Dems managed to lose with qualified, competent candidates, who reasonably expected a blowout?

I’ve come to the conclusion that many of the so-called metrics (i.e. dissatisfaction with Bush, struggling economy, long war in Iraq) are really just measuring voter attitude toward Bush and should not be seen as leading indicators on how people will vote in November.


Ben Alpers 08.27.08 at 1:46 pm


Yesterday’s Gallup tracking poll was taken before the first night of the convention. It provides no information whatsoever about a convention bounce. In addition, in past years, the bounce doesn’t appear until the third day of the convention.

Here’s another interesting series of data points. Nate Silver over on the indispensable fivethirtyeight.com calculated that the average convention bounce was nine points. The McCain campaign has announced that it “expects” Obama to get a fifteen point bounce. Presumably they are trying to build expectations for their opponent which will then be dashed.

Both Silver’s calculation and McCain’s spin suggest that we might reasonably expect something like a ten-point bounce for Obama.


Rick Dubin 08.27.08 at 2:27 pm

I have “greened my portfolio”, sold off my Obama stock and am heavily into the Nader market. Being ahead of the curve works for the wealthiest among us you know…..


Ben Alpers 08.27.08 at 2:34 pm

That’s a funny line, Rick Dubin, but you might want to substitute Cynthia McKinney for Ralph Nader. Nader is not the Green Party candidate and has in fact never even been a member of the party.


abb1 08.27.08 at 2:46 pm

Yesterday’s Gallup tracking poll was taken before the first night of the convention. It provides no information whatsoever about a convention bounce.

Bounce-schmounce, so what? He started 5-6 points ahead, and after a relatively steady slide he is now 2 points behind. If that’s not a good reason to cut your losses, I don’t know what is.


dsquared 08.27.08 at 2:53 pm

the great thing about this is that we will find out in three days’ time who’s right.


Ben Alpers 08.27.08 at 2:58 pm

Well, abb1, presumably the point of playing the market (nb: I don’t play it) isn’t to pick a winner but rather to buy low and sell high. I think it’s fair to assume that Obama’s market numbers will go up at the end of this week. So if they haven’t gone up already, that might be a good buying opportunity. At any rate, a single day of a tracking poll doesn’t tell you much about who’ll win in November or about where the IEM numbers will go in the near future.

As for Obama’s actual chances in November, I’m still going with fivethirtyeight.com’s Nate Silver’s predictions, which seem based on the most sober, thorough, and objective assessment of the polling data. According to Silver’s algorithm, Obama’s chances have certainly decreased (from a high of around 70% to a low of around 50% sometime last week). But today they are back up to 58%. And that sounds about right to me given where the campaign is at the moment.


abb1 08.27.08 at 3:13 pm

…isn’t to pick a winner but rather to buy low and sell high […] market numbers will go up at the end of this week

Good point. But I suspect people who play this particular market really are playing to pick the winner. It is a somewhat irrational goal for this kind of market, I agree.


alkali 08.27.08 at 4:47 pm

Shouldn’t the anticipated convention bounce be already priced into the contract? Or is dsquared making some other point?


Ben Alpers 08.27.08 at 5:41 pm

I’m sure that the expected bounce is built into the current IEM price, but that the bounce will almost certainly be larger or smaller than the market expects and this will create some sort of measurable reaction (and it’s hard to quantify in advance what the market-expected bounce is).

For whatever it’s worth, here‘s the graph for the 2004 WTA IEM market. That year, the Democratic Convention ran from July 26-29 and the Republican Convention from August 30 to September 2 (9/11!).

As of August 1, there seemed to be no convention bounce for Kerry, or a small Democratic convention bounce for Bush. This meant that Kerry was significantly underperforming historical expectations. However, by August 3, a modest, if still historically small, bounce had appeared.

In September, Bush’s bounce, was also small (around 2 points), though as far as I can tell nobody argued that Kerry had gotten a bounce out of Bush’s convention.

The IEM graph linked above seems to match the way these bounces compared to expectations. Kerry’s IEM numbers declining pretty steadily during the last week of July (when the convention occurred and no bounce emerged. Starting on August 3, as Kerry’s small bounce appeared, his numbers took a notable turn for the better. Bush’s numbers, on the other hand, seem to be pick up pretty rapidly right at the time of the Republican Convention (when he again took a statistically significant lead in the polls for the first time since Kerry’s bounce). Perhaps because Kerry had already had lower-than-historically-expected bounce results, Bush seems not to have been punished for his lower-than-historically-expected bounce. The gallup article that I link to above on Bush’s RNC bounce puts forward the general notion that, given the intensive coverage of modern campaigns before the convention, bounces might simply be smaller as a general rule than they were in the past. Perhaps the IEM had already assimilated this (potential) fact.

Of course an additional factor in the mix is whether those trading shares in IEM are playing the market (i.e. trying to buy low and sell high) or predicting the winner. I’m obviously not an economist, but my guess is that their behavior might be different depending on what they’re trying to do.


J Thomas 08.27.08 at 8:14 pm

Fascinating market. There are still people willing to spend 10 cents on the dollar hoping that Romney will win the republican nomination, though the average bid is only 7.3 cents.

The bet is for who will get the larger popular vote, not for who will win the election. One of the biases here is that the enthusiasm for risking 60 cents to win 40 may be much less than that to risk 40 to win 60.

Also, there may not be a market-maker here who tries to maximise the number of trades. About 18000 shares sold on the republican side since August 1. If every one of them sold to the same man, that would cost him around $8000. If he was selling his shares for what he could get and then buying them back higher, it could cost considerably less. So if somebody wants to manipulate the price for political purposes they could do so easily. What’s harder is to manipulate the price and make a profit doing it.


Ben Alpers 08.27.08 at 8:23 pm

I have a comment in moderation (due to the large number of links) that looks at the way the IEM reacted to the conventions in 2004.


nick s 08.27.08 at 11:49 pm

The circulating conventional wisdom on cablenews is that the Dem convention is ‘lacking red meat’ (with an expectation that the GOP will have four days of steak tartare) and since this is a CW market, it’s being factored in. (As Matt McIrvin says, lazy journos were busily PUMA hunting these past two days.)

(Here’s some pundosphere stuff, reflecting the institutional masochism that’s common among Democrats.)


Matt McIrvin 08.28.08 at 4:52 am

Yeah, that’s what I figure too–and then the drop is just the result of some people figuring that their estimate of the convention bounce is smaller than the previous conventional wisdom about the bounce. It’s as if a public company’s about to announce quarterly earnings (which everyone expects to be somewhat positive), but somebody sees a news item that makes them think the company might underperform the Street consensus by a few cents on the share.


dsquared 08.28.08 at 7:08 am

Well, there was plenty of liquidity for CT readers to put this trade on at prices around 54 to 54.5 yesterday, and the DEM_WTA contract is now being quoted 56.6 to 59.0. So a quick turn could have been made here and I would expect a bit more.

I suspect that Matt’s theory would be orthodox, but the IEM has never really seemed to work on this expectations basis in the past (viz, the big moves in primary races). I guess people must have been selling into the Hillary speech and are now covering.


J Thomas 08.28.08 at 2:14 pm

The last I looked, the last Obama trade + the last McCain trade added up to 1.02. It might be possible to buy one share of each for $1 and sell them for an immediate 2% profit. Or maybe not.

If you bought one share of each and put in limit sells for 0.67 and 0.47 and they both went through sometime before the election, you’d get 14%. And if one of them went through you could chicken out pretty easy, selling obama for 0.53 or McCain for .33. It looks like there’s a $5 entry fee but no vigorish for making trades.

I see a problem with volume, though. If you put in a limit order for 1000 shares and the price reaches you but there aren’t enough buyers to take the whole 1000, they *cancel* your limit order and you can’t sell until you make a new one. So it looks like it might be easy to make pennies or nickels on the market, but harder to make enough to feed your family at Burger King.

I don’t have any experience with this sort of thing, do I have the right idea or does it work some other way?

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