Political Prediction Markets: Can we use them to predict election outcomes?

Political prediction markets such as INTRADE, in which people trade stocks based on their belief about the outcome of the election or political event, offer a unique opportunity to use market behavior to predict the outcome of political events. This paper provides a two-fold contribution to the literature. First, we analyze 457 political prediction markets contracts in terms of the accuracy of their predictions at various time intervals and high-level categorizations. Second, we attempt to forecast the outcome of political prediction markets using a standard feedforward/backpropagation neural network trained on the time history of contract prices. We find that we can out perform the market predictions by between 1% 4% percent during times earlier than half-way to contract expiry. This suggests the market is not the most efficient aggregation of the likelihood of a future political event at these short times.