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Bush Gaining Market Share in Iowa Electronic Markets

Traders in the Iowa Electronic Markets (IEM) are putting their money on Republican President George W. Bush to win the presidential election, with some saying he will capture more than 52 percent of the popular vote.

As of Sept. 28, Bush was trading at 72 cents in the IEM, compared to 28 cents for Democratic U.S. Sen. John Kerry. IEM prices reflect the probability of each candidate's winning the election. Over the summer, Bush and Kerry were running neck and neck in the IEM "winner-take-all" (WTA) market, but Bush has gained market share over the last four weeks. Bush and Kerry contracts were selling for about 50 cents each on Aug. 23, but Bush contracts are now 20 cents higher.

Earlier this week, IEM directors split the WTA market, giving traders a chance to weigh in on whether Kerry or Bush would win the election with greater than or less than 52 percent of the vote. So far, trading indicates the most likely outcome to be that Bush will get greater than 52 percent of the vote. The contract associated with Bush gathering more than 52 percent of the popular vote is priced at 51 cents, compared to the contract associated with Bush gathering less than 52 percent, which is at 21 cents. The sum of these two prices give the total that investors are paying for a Bush win: 72 cents.

"Traders seem to be thinking that there is a significant probability that Bush will win, and possibly by a large margin," said Joyce Berg, IEM co-director and associate professor of accounting at the University of Iowa.

Operated as a research and teaching tool by six professors at the University of Iowa's Henry B. Tippie College of Business, the IEM is a real-money, web-based futures market. For an investment of as little as $5 or as much as $500, anyone can buy futures contracts based the outcome of the 2004 presidential election.

Started during the 1988 U.S. presidential election, the IEM has established a reputation for forecasting election results with great accuracy. It has predicted the outcome of the popular vote with an average prediction error of 1.37 percent. Research has shown that the IEM is about twice as accurate as polls conducted before presidential elections.

To date, approximately 2,800 traders have invested $290,000 in the Iowa political markets.

In the IEM "vote share" market, where payoffs are based on the percentage of the popular vote that Bush and Kerry will receive in the election, traders are predicting Bush will get 53 percent of the vote, compared to 47 percent for Kerry.

The IEM is also offering a market on which party will control the House and Senate in the Congressional elections at tippie.uiowa.edu/iem/markets/Congress04.html. This market indicates that the Republicans are favored to retain control of Congress and gain seats in both the House and Senate.


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