Political Arbitrage

This blog has been inactive since I've moved the materials to our University course management system. However, I thought this one might be of interest to a wider audience.

I put together a small illustration of linear programming using the real-money political prediction markets. I thought looking for arbitrage opportunities between markets would be an interesting discussion. This idea was sparked by a post on www.fivethirtyeight.com about trading behavior on www.intrade.com It's a tiny data set, so ideal for the classroom.

Since real money is at work in these markets, my hypothesis was that the usual no-arbitrage assumption would be live and well. Wrong. Turns out there is a lovely arbitrage opportunity between www.intrade.com and the British tote boards. It's grown over the last few days to a guaranteed $113 (after fees) return on a $1000 investment as of this morning.

Here's a pdf presentation if you're interested in these calculations.

Not sure what to make of this.