Political uncertainty and the 2012 US presidential election: A cointegration study of prediction markets, polls and a stand-out expert

Abstract

Political uncertainty is increasingly seen as important to financial markets. Particularly US presidential election uncertainty is linked to uncertainty regarding future US macroeconomic policy. But what is the best vehicle to measure political uncertainty? We examine both the cointegration and causal relationships between the Iowa and Intrade presidential futures markets (IOWA, INTRADE), along with the results of election polls (POLLS); as well as published election predictions of Nate Silver (SILVER), who was arguably the most followed political forecaster during the 2012 presidential election season. We document strong evidence that SILVER and the two prediction markets were all highly cointegrated; while POLLS was not. Consistent with the assertion made by others that INTRADE prices were manipulated in 2012 for non-pecuniary reasons, we also evidence that IOWA and SILVER both Granger-caused INTRADE. Our findings are also consistent with previous findings that election markets outperform polls as prediction vehicles. Overall, while confirming that INTRADE, IOWA and SILVER are cointegrated, we note that the three series consistently differed in the degree of optimism in an Obama victor. These results pose important questions for researchers interested in estimating political uncertainty, and assessing the efficacy of prediction markets and their international integration.