Wednesday, September 05, 2007

What explains the dramatic divergence between Obama and Clinton? A speculation

Something funny has happened in the Democratic nominee future markets in the last six weeks. Clinton's shares continue to tick higher and higher, as Obama's continue to fall toward the pack. On Intrade's exchange, Obama's shares peaked at $38.90 just before the YouTube debate on July 23 and have fallen steadily, and sometimes dramatically since then--declining $6 the week of Aug. 12--and now sit around $16. Notably, Obama's prices on the Iowa Electronic Market have faired a little better, though Clinton remains the clear frontrunner there.
For much of the year, Clinton's shares hovered around $50 and nearly converged with Obama's in the low $40s in July before the YouTube debates. But ever since early August, her prices have skyrocketed to the high $60s ($67.90 today), opening a staggering $50 difference between her and Obama. 
Bear in mind that Dean claimed a large lead over Kerry on the IEM until the day of the Caucus in 2004, so these numbers don't necessarily predict anything. At the same time, these changes suggest a a swift, significant and somewhat-arbitrary shift in opinion towards the Clinton and Obama campaigns reflectively. 
Despite the widespread publicity of the campaigns, the number of people who are paying close attention to the contours of the race is, I would guess, still relatively small. Similarly, the people who play these markets is also relatively small and homogenous, and it seems possible that some sort of cascade effect is at work here. After the debates, people began chatting about how Hillary Clinton seemed more presidential than Obama, Edwards, and the others, and suddenly that was the meme on the race. That meme was then amplified by August's relative absence of substantive political or policy moves, and soon we saw Clinton and Obama's campaigns head in divergent directions on the markets even though nothing much happened, and even though we're still four whole months from New Hampshire and Iowa. This is all, of course, just speculation, but something funny and seemingly irrational has happened in this race, and I think a cascade caused by a paucity of meaningful information may help explain these rather dramatic changes. In other words, fewer debates, forums, policy papers, and spats introduced greater volatility into the market, causing some traders to exaggerate the value of news that might meet more skepticism in June or December.
Just a thought.