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Manipulating political stock markets: A field experiment and a century of observational data

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  • Paul Rhode
  • Koleman Strumpf

Abstract

Political stock markets have a long history in the United States. Organized prediction markets for Presidential elections have operated on Wall Street (1880-1944), the Iowa Electronic Market (1988-present), and TradeSports (2001-present). Proponents claim such markets efficiently aggregate information and provide forecasts superior to polls. An important counterclaim is that such markets may be subject to manipulation by interested parties. We analyze this argument by studying alleged and actual speculative attacks— large trades, uninformed by fundamentals, intended to change prices— in these three markets. We first examine the historical Wall Street markets where political operatives from the contending parties actively and openly bet on city, state and national races; the record is rife with accusations that parties tried to boost their candidates through investments and wash bets. Next we report the results of a field experiment involving a series of planned, random investments-- accounting for two percent of total market volume-- in the Iowa Electronic Market in 2000. Finally, we investigate the speculative attacks on TradeSports market in 2004 when a single trader made a series of large investments in an apparent attempt to make one candidate appear stronger. In the cases studied here, the speculative attack initially moved prices, but these changes were quickly undone and prices returned close to their previous levels. We find little evidence that political stock markets can be systematically manipulated beyond short time periods.

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Bibliographic Info

Paper provided by The Field Experiments Website in its series Natural Field Experiments with number 00325.

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Date of creation: 2006
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Handle: RePEc:feb:natura:00325

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  1. Steven Gjerstad, 2004. "Risk Aversion, Beliefs, and Prediction Market Equilibrium," Microeconomics, EconWPA 0411002, EconWPA.
  2. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 2(2), pages 161-74, Spring.
  3. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296980, October.
  4. Hansen, Jan & Schmidt, Carsten & Strobel, Martin, 2001. "Manipulation in political stock markets: Preconditions and evidence," SFB 373 Discussion Papers 2001,61, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  5. Hanson, Robin & Oprea, Ryan & Porter, David, 2006. "Information aggregation and manipulation in an experimental market," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 60(4), pages 449-459, August.
  6. Werner Antweiler & Murray Z. Frank, 2004. "Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards," Journal of Finance, American Finance Association, American Finance Association, vol. 59(3), pages 1259-1294, 06.
  7. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, American Finance Association, vol. 49(1), pages 153-81, March.
  8. Froot, Kenneth A & Scharftstein, David S & Stein, Jeremy C, 1992. " Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1461-84, September.
  9. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  10. Colin F. Camerer, 1998. "Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(3), pages 457-482, June.
  11. Colin Camerer, 1998. "Can asset markets be manipulated? A field experiment with racetrack betting," Natural Field Experiments, The Field Experiments Website 00222, The Field Experiments Website.
  12. Merrick, John Jr & Naik, Narayan Y. & Yadav, Pradeep K., 2005. "Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze," Journal of Financial Economics, Elsevier, Elsevier, vol. 77(1), pages 171-218, July.
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Cited by:
  1. Erik Snowberg & Justin Wolfers & Eric Zitzewitz, 2011. "How Prediction Markets can Save Event Studies," CAMA Working Papers 2011-07, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Masami Imai & Cameron A. Shelton, 2010. "Elections and Political Risk: New Evidence from Political Prediction Markets in Taiwan," Wesleyan Economics Working Papers 2010-001, Wesleyan University, Department of Economics.
  3. Riekhof, Hans-Christian & Riekhof, Marie-Catherine & Brinkhoff, Stefan, 2012. "Predictive Markets: Ein vielversprechender Weg zur Verbesserung der Prognosequalität im Unternehmen?," PFH Forschungspapiere/Research Papers 2012/07, PFH Private University of Applied Sciences, Göttingen.
  4. Cary Deck & Shengle Lin & David Porter, 2010. "Affecting Policy by Manipulating Prediction Markets: Experimental Evidence," Working Papers, Chapman University, Economic Science Institute 10-15, Chapman University, Economic Science Institute.
  5. Chezum, Brian & Stowe, C. Jill, 2010. "Some Evidence of Information Aggregation in Auction Prices," 2011 Annual Meeting, February 5-8, 2011, Corpus Christi, Texas, Southern Agricultural Economics Association 98528, Southern Agricultural Economics Association.

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