The French Presidential election will be held April 22. The election focus has been between UMP center-right candidate Nicolas Sarkozy and Socialist Party candidate Segolene Royal. Sarkozy has a slight lead, but 40% of the electorate is undecided. A change in government even if on the surface seems to be similar to the past may cause market uncertainty, but the first issue is determining who will win.
An easy way to handicap an election is through using the results from prediction markets. These trading markets provide a good measure of how dollar votes handicap a discrete event. One place where election probabilities can be measured is at www.intrade.com. The current numbers in the French prediction market show that Sarkozy will win big with 65% of the vote. This percentage is up from below 20% at the beginning of December in 2006. This gain is clearly at odds with many news reports and should be a good test of a prediction market.
How has this translated into movement in the stock market? The CAC futures on the French stock index can be compared with the German Dax futures market through looking at normalized spreads. There has been a strong downtrend in the French market relative to German stocks since the beginning of the year. The steady increase in Sarkozy’s prediction numbers have coincided with the decline in the normalized spread between the two largest stock markets in Euroland. If this a comment on whether the presidential winner will be more anti-business? Actually, more populist statement from Sarkozy has increased his standing in the polls which may have translated to falling stock prices.
Getting comfortable with prediction markets will be especially useful as we move closer to the 2008 US presidential election. There are currently market prices for both Republican and Democrat candidates. At this stage, the numbers suggest we do not have a clear picture of who either party candidate will be. How this is being discounted in the equity markets has yet to be determined.
No comments:
Post a Comment