Iowa Electronic Markets Leaning toward Status Quo in U.S. Congress
As of Oct. 18, the IEM Congressional Control market shows an 82 percent probability of Republican control of the house, and a 61 percent probability of Democrats controlling the Senate.
Through its web-based futures market, the IEM provides political pundits and neophytes alike the opportunity to predict whether the Democrats or Republicans will control Congress after the November congressional elections. Traders can back up their predictions by buying and selling futures contracts in the IEM based on different election outcomes. Six professors at the Henry B. Tippie College of Business at the University of Iowa opened the market in July.
Prices in this market can fluctuate rapidly with new information, such as campaign news or actions by the candidates. Around Oct. 1, there was volatility in the IEM after Sen. Robert Torricelli (D-New Jersey) dropped out of the Senate race and after the accusations of impropriety in Sen. Tom Harkin's (D-Iowa) campaign, said Thomas Rietz, IEM co-director and associate professor of finance at the Tippie College. Traders gave the Republicans the edge in the Senate race for a short time, but the market returned to its earlier levels when former Sen. Frank Lautenberg stepped in to take Torricelli's place.
IEM predictions are often more accurate than poll results because traders are investing real money and "put their money where their mouths are," Rietz said. It also tends to attract people who are interested in politics and are therefore more likely to make informed decisions, he explained.
The IEM has approximately 17,200 traders and $152,000 in equity.
The IEM is a small-scale, real-money market used as a teaching and research laboratory. For an investment of as little as $5 or as much as $500, trading in the markets is open to participants worldwide. At the close of trading on Nov. 7, the liquidation value of the contract that represents the actual outcome of the election will be $1. All other contracts will have a value of zero.
Since its beginning in the 1988 U.S. Presidential election, the IEM has established a reputation for forecasting election results with great accuracy, with an average prediction error of 1.37 percent.
For more information, see the Iowa Electronic Markets website or contact the IEM office at (319) 335-0881.
Contact: George McCrory, UI News Service, 319-384-0012