How prediction markets help us understand events‘ impact on the vote in US Presidential Elections

Abstract

In this paper we argue that pre-election polls and prediction markets reflect two different processes which, by analyzing them together, can help us understand if and how key events which occur during an election campaign influence the final outcome. While polls can be seen as reflecting the voters’ enlightening process towards realizing their vote preferences, prediction markets have this process incorporated into their prediction. We study the movements of weekly poll ratings and IEM market predictions and measure the impact selected events have on these in the run-up to the US 2004 and 2008 presidential elections. We conclude that the Swift Boat ad campaign in 2004 was an enlightening event which moved poll ratings in favor of President Bush, towards the level the IEM market had predicted already before the Swift Boat event. The financial crisis in 2008, on the other hand, was an enlightened event. It came as news to both market traders and poll respondents, sealing the victory for Obama.