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Predictive Accuracy of Political Stock Markets Empirical Evidence from a European Perspective

That sticky wages and inflation targeting are uneasy bedfellows is easy to see. When wages are sticky, an inflation targeting central bank in effect targets the real wage. This produces inefficient outcomes when shocks occur which require an adjust- ment to the real wage (Erceg, Henderson and Levin (2000).) For example, suppose a shock - a positive oil price shock, say - occurs which reduces the value marginal product of labor. Preventing a large fall in employment under these circumstances wouldrequireadropintherealwage.Withstickywagesandaninflation-targeting central bank, the required fall in the real wage would not occur and employment would be inefficiently low | Predictive Accuracy of Political Stock Markets Empirical Evidence from a European Perspective Michael Berlemann Carsten Schmidt Dresden University of Technology Chair for Money Credit and Currency berleman@rcs.urz.tu-dresden.de Humboldt-Universitat zu Berlin Institute for Economic Theory III cschmidt@wiwi.hu-berlin.de August 9 2001 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. JEL Classification C93 D82 G1 Keywords political stock markets forecasting market efficiency proportional representation We thank Forrest Nelson Joyce Berg and the other members of the Iowa Electronic Markets for the great support in planning and conducting political stock markets in the last decade. Data has been provided by Gregor Bruggelambert Arwed Cruger and Gerhard Ortner. We would like to thank Gregor Bruggelambert Werner Guth Alexander Karmann Manfred Konigstein Rudolf Muller Gerhard Ortner Jan Potters and Andreas Stiehler for helpful comments. Financial support from the German Science Foundation DFG grant no. SFB 373 C5 is gratefully acknowledged. Contents 1. INTRODUCTION.3 2. DATA DESCRIPTION.6 2.1 Basic features of the data.6 2.2 Political stock markets in Germany.8 2.3 HOW TO MEASURE predictive accuracy.10 3. DO MARKETS PREDICT BETTER THAN POLLS .11 3.1 Political stock markets.11 3.2 Polls.12 3.3 Comparison and Hypothesis.15 3.4 empirical results.18 4. WHAT MAKES .