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Economic analysts use Iowa Electronic Markets to predict elections

At least two economic analysts are using the forecasting ability of the Iowa Electronic Markets (IEM) as a tool to predict the outcome of the upcoming presidential and congressional elections.

These analysts are using IEM, the University of Iowa's real-money market where traders buy and sell political futures, as a tool to advise investors about the economic impact of the upcoming elections. In their reports, the analysts looked at how fiscal policy and financial markets might be affected if either Democrats or Republicans swept Congress and the presidency, or the impact if there would continue to be a split among the parties for control of the executive and legislative branches.

In its Oct. 23 economic research report, International Strategy and Investment (ISI) gives George W. Bush the edge and rates the GOP as favorites for the U.S. House of Representatives and U.S. Senate as well, although control of the House could go down to the wire.

"This means there's a good chance investors will have to contend with the implications of one-party government," the ISI report said. With this assessment, ISI also advises investors to expect a rally in drug, tobacco, and defense shares, as well as in Microsoft stock. In the bond market, ISI says Treasury rates should rise.

ISI interpreted IEM data to chart the upswing in Bush's prospects in conjunction with recent polls. On Wednesday, IEM traders favored Bush by a one-cent margin, at 50 cents compared to Gore at 49 cents in the presidential vote share markets. In this vote share market, prices can be seen as predicting the percentage of the vote each candidate will receive.

"This race is still very tight compared to other races the IEM has tracked," said Tom Rietz, UI associate professor of finance and IEM co-director.

In the IEM "winner-take-all" market, IEM traders currently favor Bush, whose price is at 58 cents while Gore's price is at 42 cents. These prices predict each candidate's chances of winning the nomination rather than the size of the victory.

In the IEM congressional control market, the IEM contract for a Democrat-controlled House and a Republican- controlled Senate is trading at 46 cents, compared to contracts for a Republican sweep of Congress at 48 cents.

"The price in the Congressional Control Market has been changing since early October, when the chance of a Republican sweep of the House and Senate was seen as only 36 percent by the market," said Joyce Berg, UI accounting professor and IEM co-director.

In its Oct. 3 economic report, Credit Suisse First Boston gauged the impact on fiscal policy and the Treasury market, by assessing whether either party has a chance at a clean sweep, gaining control of the House, Senate and executive branch.

"That would raise the odds considerably for a discretionary, front-loaded loosening in fiscal policy," the report said. "A continuation of a divided government would reduce the risk of significant discretionary changes in fiscal policy between now and election 2004."

Credit Suisse First Boston also tracks the IEM against Treasury yield curves, noting that changes in the IEM's assessment of a clean sweep are reflected in the yield curve.

The IEM has forecasted election results with great accuracy, tracking the Democratic and Republican vote shares in the last three presidential elections within an average of less than 2 percent.

The IEM has 7,000 traders and more than $200,000 in equity. For an investment of as little as $5 or as much as $500, trading in the markets is open to participants worldwide. Six faculty members at the University of Iowa Tippie College of Business operate the markets as a research and teaching tool. See the markets online at http:/tippie.uiowa.edu/iem/ for the latest prices.

For more information about the IEM, contact Jeanine Alcocer, IEM operations manager at (319) 335-0794.


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