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Predictive accuracy of political stock markets: Empirical evidence from an European perspective

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  • Berlemann, Michael
  • Schmidt, Carsten

Abstract

In a meta study of 25 political stock markets conducted in Germany in the last decade we analyze their predictive success. Although the predictions of political stock markets are highly correlated with the corresponding polls, the markets are able to aggregate additional information. One explanatory variable for variations in predictive success of the German stock markets relative to the polls is market efficiency. Even though the overall predictions of the political stock markets are quite reliable on the aggregate level we find systematic prediction errors on the contract level that can be attributed to the vote share size and to individual trader biases.

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  • Berlemann, Michael & Schmidt, Carsten, 2001. "Predictive accuracy of political stock markets: Empirical evidence from an European perspective," Dresden Discussion Paper Series in Economics 05/01, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    • Handle: RePEc:zbw:tuddps:0501
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    4. Jacobsen, Ben & Potters, Jan & Schram, Arthur & van Winden, Frans & Wit, Jorgen, 2000. "(In)accuracy of a European political stock market: The influence of common value structures," European Economic Review, Elsevier, vol. 44(2), pages 205-230, February.
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    7. Robert Forsythe & Murray Frank & V. Krishnamurthy & Thomas W. Ross, 1995. "Using Market Prices to Predict Election Results: The 1993 UBC Election Stock Market," Canadian Journal of Economics, Canadian Economics Association, vol. 28(4a), pages 770-793, November.
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    Cited by:

    1. Carsten Schmidt & Axel Werwatz, 2002. "How accurate do markets predict the outcome of an event? The Euro 2000 soccer championships experiment," Papers on Strategic Interaction 2002-09, Max Planck Institute of Economics, Strategic Interaction Group.
    2. Hans Gersbach & Markus Müller, 2010. "Flexible pensions for politicians," Public Choice, Springer, vol. 145(1), pages 103-124, October.
    3. Hauser, Florian & Huber, Jürgen, 2012. "Short-selling constraints as cause for price distortions: An experimental study," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1279-1298.
    4. Jan Hansen & Carsten Schmidt & Martin Strobel, 2004. "Manipulation in political stock markets - preconditions and evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 11(7), pages 459-463.
    5. Michael Berlemann, 2004. "Experimental stock markets as instruments for business forecasts," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 57(16), pages 21-29, August.
    6. Michael Berlemann & Forrest Nelson, 2005. "Forecasting Inflation via Experimental Stock Markets Some Results from Pilot Markets," ifo Working Paper Series 10, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    7. Hans Gersbach & Oriana Ponta, 2017. "Unraveling short- and farsightedness in politics," Public Choice, Springer, vol. 170(3), pages 289-321, March.
    8. Gersbach, Hans & Müller, Markus, 2006. "Elections, Contracts and Markets," CEPR Discussion Papers 5717, C.E.P.R. Discussion Papers.
    9. Berlemann, Michael, 2001. "Forecasting inflation via electronic markets: Results from a prototype market," Dresden Discussion Paper Series in Economics 06/01, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    10. Hans Gersbach & Markus Müller, 2011. "Information Markets, Elections and Contracts," CESifo Working Paper Series 3327, CESifo.
    11. Berlemann, Michael, 2008. "Forecasting the ECB's main refinancing rate. A field experiment," Economics Letters, Elsevier, vol. 99(2), pages 379-383, May.

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    More about this item

    Keywords

    political stock markets; forecasting; market efficiency; proportional representation;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G1 - Financial Economics - - General Financial Markets

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