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IEM Data Used To Predict Equities Market

Do elections affect share prices? Well, history says the first year after the election (or re-election) of a Republican president is nearly always a bear market for US equities, for example. But what if I told you that George W. Bush's win in the 2000 US presidential election transferred over $US100 billion in market capitalization to companies that Wall Street analysts expected to profit from a Bush victory? This riveting snippet of information comes from a recent paper by US economist Brian Knight. His interest was piqued by reports in The New York Times and elsewhere the day after the Supreme Court ruled in favor of Bush over the disputed Florida ballot papers. Among other things, Knight calculated the difference between Bush and Al Gore equity prices and plotted it against the probability of a Bush victory. The probability was derived from the value of futures contracts for the two candidates on the IOWA ELECTRONIC MARKET (IEM). The IEM is a fascinating story in its own right. Set up by the business school at the UNIVERSITY OF IOWA, it allows you to buy and sell "shares" in a presidential candidate online, with the final payout depending on who wins the popular vote -- $US1 per share if your candidate wins; nothing if he loses.


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