Prediction market shows highest probability for PSOE-Podemos and PP-Ciudadanos government

15 Jun, 2016 -

From today on Politikon publishes live forecasts about the composition of the next Spanish government (see the graph below). The data stem for a prediction market, which I conduct together with Sveinung Arnesen (University of Bergen, Norway) and in collaboration with Rafael Leonisio (University of the Basque Country). The goal of this prediction market is to measure the likelihood of different compositions of the next Spanish government. Currently, the market rates a PP-Ciudadanos and a PSOE-Podemos government as the two most likely outcomes.

A prediction market very much looks like a stock market. But instead of trading financial products market participants trade shares of future events. On our prediction market, for example, the participants buy and sell a contract called “PP and Ciudadanos without PSOE and Podemos” meaning that PP and Ciudadanos will together form the next Spanish government. The market is set up in a way that the prizes of the contracts reflect the probability with which the events they describe take place. The participants can buy shares if they think the probability that a certain event takes place is higher than the current price suggests and sell shares if they think the probability for such an event is lower.

At the time of writing one share of the contract called “PP and Ciudadanos without PSOE and Podemos” costs 0.038 Euros, which means that the probability that this will be the next Spanish government is 38%. At the time being this happens to be 10% less than the probability that the next government will be formed by a coalition of PSOE with Podemos (the latter costs 0.048 Euros).* In contrast to these two government coalitions a PSOE-Ciudadanos government without the inclusion of PP and Podemos is considered to be extremely unlikely. Finally, the scenario that any other type of government (e.g. a PP minority government) will be formed is considered somewhat likely (at this moment 13% probability).

The participants of the prediction market are currently about 70 social science students of the University Carlos III of Madrid and the University of the Basque country. We endowed each of them with 10 Euros to trade on the market and increase the value of their portfolio. The prediction market does not allow for participants to go into debts nor to participate with their own money.

*Note that both contracts include the possibility of ‘toleration’ by any other party and the inclusion of small parties such as the nationalist parties.

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