I think it would be extremely material for the 2020 Presidential Election. Lets say for sake of argument that Biden winning means the TCJA gets partially reversed and corporate tax rates go up 2%. That would have an extremely large (downward) impact on stock prices.
The market cap for stocks is huge O(10^13) compared to amounts wagered on the Presidential Election O(10^8), so any effect is going to swamp prediction markets.
However, I don’t believe that this effect is material to prediction markets at the moment.
1/ Prediction markets just aren’t super efficient. Compare PredictIt (41%), Betfair (36%) and various other venues to see the kind of differences out there in estimates for the odds of Trump winning re-election.
2/ Volumes aren’t super high, so this sort of hedging the author talks about is a long time away.
3/ Financial actors have much more liquid ways of hedging election risk than hedging in thin prediction markets.
I think it would be extremely material for the 2020 Presidential Election. Lets say for sake of argument that Biden winning means the TCJA gets partially reversed and corporate tax rates go up 2%. That would have an extremely large (downward) impact on stock prices.
The market cap for stocks is huge O(10^13) compared to amounts wagered on the Presidential Election O(10^8), so any effect is going to swamp prediction markets.
However, I don’t believe that this effect is material to prediction markets at the moment.
1/ Prediction markets just aren’t super efficient. Compare PredictIt (41%), Betfair (36%) and various other venues to see the kind of differences out there in estimates for the odds of Trump winning re-election.
2/ Volumes aren’t super high, so this sort of hedging the author talks about is a long time away.
3/ Financial actors have much more liquid ways of hedging election risk than hedging in thin prediction markets.