Why is there such a large statistical “arbitrage” opportunity on Intrade right now? I am not all too familiar with prediction markets but Obama re-elected at $6.61 ask at current prices and Obama is predicted to be 84% likely to win seems like a large enough spread to make this a smart bet.
Worse, there is a 10 point actual arbitrage between Pinnacle and Intrade. Also, Betfair is close to Pinnacle. I haven’t followed this long, but I believe there is a long-standing 5 point arbitrage.
Although Intrade, the most widely cited prediction market, is fairly kind to Mr Romney and shows him with a 33% chance of victory, tight legal restrictions on deposits to the site have made it very difficult for Americans to wager there. That makes it very thinly traded and unreliable, since bets of just a few thousand dollars can move the market price substantially. The real money laid on the election goes to bookmakers, who uniformly see Mr Obama as an overwhelming favourite. Pinnacle Sports in Las Vegas shows him with a 77.5% likelihood of victory, and Ladbrokes in Britain has him at 81%.
The failure of that article to mention Betfair makes it hard for me to take it seriously.
If the Economist thinks the explanation is that Intrade is thinly traded, it should think it volatile. It is true that a small wager moves the market, but it consistently returns to 5-10 points below the bookies. Similarly, the prediction market Betfair is in exactly the same legal situation as the Intrade, has matched the same amount of money ($30 million) and has about the same amount of open interest, but consistently tracks the bookies. The question is not why do prediction markets diverge from the bookies, but why Intrade consistently diverges from everyone else.
Why is there such a large statistical “arbitrage” opportunity on Intrade right now? I am not all too familiar with prediction markets but Obama re-elected at $6.61 ask at current prices and Obama is predicted to be 84% likely to win seems like a large enough spread to make this a smart bet.
Worse, there is a 10 point actual arbitrage between Pinnacle and Intrade. Also, Betfair is close to Pinnacle. I haven’t followed this long, but I believe there is a long-standing 5 point arbitrage.
The Economist writes:
The failure of that article to mention Betfair makes it hard for me to take it seriously.
If the Economist thinks the explanation is that Intrade is thinly traded, it should think it volatile. It is true that a small wager moves the market, but it consistently returns to 5-10 points below the bookies. Similarly, the prediction market Betfair is in exactly the same legal situation as the Intrade, has matched the same amount of money ($30 million) and has about the same amount of open interest, but consistently tracks the bookies. The question is not why do prediction markets diverge from the bookies, but why Intrade consistently diverges from everyone else.
The question is how much do you agree with Nate Silver?