Thursday, July 19, 2012

Clear Arbitrage Opportunity on Intrade

Even though intrade continues to gain in popularity as an indicator of the probability of a future event happening, it's interesting that the market seems to have some glaring inefficiencies.  Not only is volume relatively light, but also, there is a clear arbitrage opportunity in the site's most popular contract.

Right now the Obama and Romney presidential contracts sum to show that there is only a 97.6% chance that Obama or Romney will be elected president this year.  Seeing as how there is no viable 3rd party candidate in the race, the contracts seem to be discounting that there is a 2.4% probability that either Barack Obama or Mitt Romney will drop out of the race between now and November.  

If an investor were to buy both contracts today, he or she could stand to earn a nearly risk free 2.4% between now and November: an annualized return of 8.1%.

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