The Odds On the Referendum Outcome

What is the best way to forecast the outcome of the independence referendum ? This is an important issue for individuals, organisations and businesses planning the future. In this paper I calculate a new way of forecasting the referendum outcome. It uses  “prediction markets” rather than opinion polls to forecast the outcome. It builds on an important theorem in financial economics – the “efficient markets hypothesis” (EMH). It is an important aid to the understanding of financial and economic markets. The basic idea is that the market price of an asset or good reflects all the information relevant to setting that price. If the EMH is true, there is no point in trying to beat the market because any information that might have a bearing on the price is instantly reflected in the price. One of the best examples of this effect was documented by Roll (1984). He showed that the production of concentrated orange juice was concentrated in a relatively small area around Miami, Florida. The yield, and therefore the price, of the orange juice were highly dependent on weather conditions in this area. He showed that the futures price of orange juice was closely linked with local weather forecasts and indeed outperformed these forecasts in day-ahead temperature predictions. The use of prediction markets in relation to electoral outcomes is well-established. Their accuracy relies on there being some well-informed, dispassionate traders/gamblers who wish to profit from their trades/bets. Though these conditions do not always hold, prediction markets have a good record in forecasting future outcomes. Based on odds offered by 23 bookmakers, the probable outcome of the Scottish referendum up to May 2014) suggests that there is a 70 per cent chance of a No vote (approx.1/2 in terms of odds). The paper also compares the market probabilities with opinion polls and speculates that changes in these polls, which measure voting intentions at a particular point in time, may have an effect on the prediction market for the Scottish referendum. Other evidence suggests that Yes voters are more willing to take risks than No voters. While this might affect the prediction market for the outcome of the referendum, there is no evidence that this is the case.

About David Bell

David Bell FRSE is Professor of Economics at the University of Stirling. He graduated in economics and statistics at the University of Aberdeen and in econometrics at the London School of Economics. He has worked at the Universities of St Andrews, Strathclyde, Warwick and Glasgow. His research is mainly in labour economics, fiscal decentralization and the economics of long-term care. He has been budget adviser to the Scottish Parliament Finance Committee. He is PI for the Healthy AGing In Scotland project (HAGIS).
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