The 1997 UBC Election Stock Market

Since 1993, the UBC Election Stock Market Project (UBC-ESM) in the Faculty of Commerce and Business Administration at the University of British Columbia has been operating “election stock markets”. These stock markets test the ability—long appreciated by economists—of markets to aggregate and disseminate information.1 They show how the information gathered by markets from buyers and sellers, who may live thousands of miles apart and never communicate directly with one another, can be applied to provide accurate predictions of certain future events—in this case, elections.2 The model of the electronic election stock market we use was first developed by a team at the University of Iowa for the 1988 U.S. Presidential Election.3 It has since been adapted to study elections in many countries.4 The shares or contracts bought and sold in these markets are tied to the fortunes of political parties (or, in some cases, candidates), thus their prices tell us something about what traders think these fortunes will be. For example, a holder of a Liberal contract in our 1997 Seats Market knew that after the election this contract would be liquidated by us for a value of $1 times the fraction of seats won by the Liberal Party in the election. Since the Liberals won 51.5 per cent of the seats in the House of Commons, each Liberal contract in this market was liquidated at 51.5 cents. Since traders are assumed to be forward thinking when they buy and sell these contracts with each other during the election campaign, the price of a contract at any point in time represents the market’s prediction of the share of seats to be won by that party.5 To date, markets have been run on three elections in Canada: the 1993 Canadian General Election, the 1996 British Columbia Election and the 1997 Canadian General Election. The purpose of this note is to present some of the results of the 1997 election market.6 The UBC-ESM is a research and teaching venture. On the research side, we are using UBCESM data to study, for example, (i) the extent to which markets can aggregate information to make accurate predictions of future events (Forsythe et al. 1995), (ii) the dynamics of political campaigns (Forsythe et al. 1997a) and (iii) certain apparently “irrational” trader behaviours (e.g. Forsythe et al. 1997a and 1997b). We also have great hope for the UBC-ESM as a vehicle for teaching, in an integrated way, certain principles of economics and finance, and for providing an interesting new way for students to study election campaigns. We are keen to raise awareness of what we are doing in the hope that we will be able to attract larger numbers of traders in future election markets, that teachers will find ways to use our markets in the classroom, and that other researchers might be able to make use of our data.