Government Shutdown Creates Price Instability on Iowa Electronic Markets
Prices on the Iowa Electronic Markets' Congressional Control market have tightened considerably since the government shutdown began Oct. 1.
The price of the contract that represents the current Congressional configuration—Republican House of Representatives/Democratic Senate—has dropped, while the contract that represents a Democratic sweep has risen.
The Republican House/Democratic Senate contract was selling for 54 cents on Sept. 30, which means traders believed there was a 54 percent probability the Republicans would retain the House and the Democrats the Senate after the 2014 Congressional elections. The contract representing a Democratic sweep of the two chambers was selling for 16 cents that day, representing a 16 percent probability.
However, as of Wednesday morning, the price of the Republican House/Democratic Senate contract has fallen to 45.6 cents, while the price of the Democratic sweep contract has nearly doubled to 31.5 cents.
The price of the contract representing a Republican sweep was selling for 12 cents Wednesday, while the contract for a Democratic House/Republican Senate was selling for less than 1 cent. The contract for Other—which would pay off in the event that neither party has a majority in one of the two chambers—was selling for 8.2 cents.
A real money futures market operated by the University of Iowa's Tippie College of Business, the IEM gives traders the opportunity to buy and sell contracts based on what they think the outcome of a future event will be. Contracts for the correct outcome pay off at $1, all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen. Traders can invest up to $500 in the market.
The latest market prices can be found at iemweb.biz.uiowa.edu/quotes/Congress14_quotes.html.
Contact: Barbara Thomas, Tippie College of Business, 319-335-2188