IEM Predicts Google Post-IPO Price
Having established a reputation for accurately predicting elections, the operators of the University of Iowa's Iowa Electronic Markets (IEM) let their traders try to predict Google's eventual value. For six weeks prior to the IPO, participants in the IEM traded in two markets designed to predict the market capitalization of Google's stock at the end of the first day of trading.
In the first market, participants traded contracts with payoffs based on the actual market capitalization (stock price multiplied by the number of shares outstanding) at the end of the first day of trading. The (normalized) prices in this market indicated the participants' expectations of the market capitalization. While predictions in this market ranged from a peak of $37.5 billion down to $24.8 billion, the prediction on Aug. 18 (the night before trading opened) was $26.7 billion. The actual market capitalization at the end of the day was 27.2 billion, resulting in a prediction error of only 1.8 percent of the realized capitalization.
The second market consisted of winner-takes-all contracts, which pay $1 per contract to traders who picked the correct range in which the market cap fell at the end of the first day of trading. From Aug. 10 through Aug. 17, traders in this market predicted the most likely capitalization range to be $25 to $30 billion. However, on Aug. 18, expectations weakened and IEM predictions shifted to the $20 to $25 billion range. The accurate range of $25 to $30 billion ran a close second.
The IEM is operated as research and teaching tool by six professors at the University of Iowa's Henry B. Tippie College of Business. The markets can be accessed at tippie.uiowa.edu/iem>. Traders can open accounts by depositing anywhere from $5 to $500 with the operators of the market.
Contact: George McCrory, UI News Service, 319-384-0012