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Prediction Markets on the Surge
Mark Thoma points us to a new paper by Michael Greenstone that tries to evaluate the effect of the surge. The news is not good.
This paper shows how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of today's Iraq surviving into the future. In particular, I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there is a sharp decline in the price of those bonds, relative to alternative bonds. The decline signaled a 40% increase in the market's expectation that Iraq will default. This finding suggests that to date the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it.
It's amazing how far we have come since 2003 when Robin Hanson's DARPA-funded Policy Analysis Market was ridiculed and canceled.
Posted by Alex Tabarrok on September 14, 2007 at 05:42 PM in Economics | Permalink
Comments
But what has been going on with the Iraqi stock market? Isn't that market dominated by Iraqi insiders,
with inside knowledge, whereas state bonds are owned by foreigners reading the New York Times?
Posted by: B.H. at Sep 14, 2007 6:26:35 PM
Prediction markets worry me sometimes. It's as volitile as Wall Street, but with 100% speculation.
Posted by: Nick at Sep 14, 2007 8:58:07 PM
But that only suggests that things have gotten worse after the surge. It's not evidence that things got worse because of the surge. For all we know, things might have been even worse without the surge.
Posted by: Hei Lun Chan at Sep 14, 2007 9:44:26 PM
This isn't about "prediction markets" per se, but about using ordinary government bond market data to infer a prediction about the success of current efforts.
Posted by: Mike-KP at Sep 15, 2007 12:06:00 AM
I don't think the performance of the Iraqi state bonds has all that much to do with the surge,
except in the broad sense that the surge was supposed to bring about national political harmonization,
and what we are now being sold on is a ground-up soft partition, with al-Anbar the poster boy, at least
until Sheikh Abu Risha got offed.
No, the economic bottom line is oil. And now we have the spectacle of Bush buddy and appointee to the
Foreign Intelligence Advisory Board, not to mention trustee of SMU in Dallas who organized the W. Bush
library to be there, signing a contract for his company, Hunt Oil, with the Kurdistan Regional Government,
a contract since declared illegal by the Iraqi national Oil Minister, Hussein al-Shahristani, leading the
Kurdish leaders to demand his removal, all in the context of no agreement on a national Iraqi national
oil law.
The bottom line is that the best informed Bush-Cheney insider is betting on the disintegration of Iraq.
No wonder their bonds are in the toilet (and if the prediction markets could not pick up on this, they
really would be worth doodley-squat).
Posted by: Barkley Rosser at Sep 15, 2007 2:27:43 AM
The bond market analysis here seems like total garbage. Does this guy Greenstone have any idea what credit spreads generally have been doing in the past two months. In fact, if you plot the spread between BBB corporates and Treasuries, it looks a lot like the curves he plots: has the surge damaged BBB corporations too? What nonsense.
Posted by: y81 at Sep 15, 2007 8:59:43 AM
The paper is a bad joke.The author doesn't even know how to calculate default probabilities.
Posted by: jck at Sep 15, 2007 12:28:47 PM
Ummm... Looking through the paper on page 53 there's the graph that shows the spread between the bonds from Iraq and the other nearby country, and there's a *jump* in the spread at 150 days after the surge, from around 4 points to 5 points. The text notes that two things happened at that time: there was an initial report on how few of the surge benchmarks had been met and also there was an attempted cloture vote to pull out of Iraq (with only 52 voting in favor)... It's difficult to tell one effect from the other. Overall, I think that the location of the jump makes the yield spread perhaps the weakest part of the paper in terms of assessing the effectiveness of the surge (and it is the last point in the body of the text).
The paper notes several trends appearing to stabilize (weekly troop deaths level off if don't decline, the decline in oil production seems to stabilize, etc.) after the surge. But there's no discontinuity around the date of the start of the surge. It's an extremely informative paper and a good systematic presentation of empirical evidence, but it isn't exactly conclusive about whether or not the surge is working.
Posted by: hrh at Sep 15, 2007 12:36:47 PM
hrh, have you tried plotting BBB CMBS spreads to Treasuries? Apparently the news from Iraq in July affected them too, or something.
Posted by: y81 at Sep 15, 2007 12:58:09 PM
But there's no discontinuity around the date of the start of the surge.
The surge was heavily discussed for months before it began and its start date was no secret, so you wouldn't expect a discontinuity.
Posted by: bza at Sep 15, 2007 2:31:04 PM
But, bza, there is a big discontinuity at the time that troubles developed in the United States subprime mortgage market. What does this tell us?
Posted by: y81 at Sep 15, 2007 8:22:31 PM
Barkley,
I got 5 bucks says you are wrong about Iraq "disintegrating", say in the
next 6 to 8 months?
Are we on for an even money wager?
I'll let Alex hold my $5 if you accept the bet and do
likewise.
Posted by: indiana jim at Sep 15, 2007 9:33:38 PM
http://kentsimperative.blogspot.com/2007/09/markets-for-prediction-versus.html
...We thus were initially quite interested in a new paper which attempts to evaluate the Surge through the lens of a prediction market approach. However, the key difference we note is that the paper is an attempt to measure...
Posted by: Kent's Imperative at Sep 16, 2007 9:53:00 PM
More or less looks like a response to the Democratic reaction that that "we have already lost the war"(Reid). Investors are pulling out after it has became evident that we'd (those in charge in Congress) prefer NOT to win, rather than that things are not going well.
Posted by: Tom at Sep 17, 2007 12:11:18 PM
Note for others - y81 spent many, many comments on the Washington Monthly
post demonstrating that reading comprehension isn't among his/her skills.
Posted by: Hei Lun Chan:
"For all we know, things might have been even worse without the surge."
In that case, since the surge (a) hasn't demonstrated any lasting effect,
and (b) isn't sustainable, .... :(
Tom: "More or less looks like a response to the Democratic reaction that that "we have already lost the war"(Reid). Investors are pulling out after it has became evident that we'd (those in charge in Congress) prefer NOT to win, rather than that things are not going well."
Just in case you haven't been reading the news for the past four years,
things have been going downhill since May, 2003. During a time of GOP
dominance. When Bush was getting everything that he wanted for the war.
Despite reassurrance after reassurrance after reassurrance that things
would get better any day now. Despite highly confident predictions that
some event (killing Saddam's sons, capturing Saddam, elections,
various new generals, various new tactics, etc.) would save the day.
Posted by: Barry at Sep 18, 2007 10:00:26 AM
The surge has been going on since May 2003? You're right, I did miss that one. Most reports show the surge is working and we now have to reassure the Iraqis who are helping us that we will not leave them in the lurch. Reid's comments do not help, but hurt.
Then again he is not interested in helping. Any good news in Iraq is bad news for the democrats - So we don't want to hear good news, do we? That may help GWB, who is obviously a greater threat than any Muslim. Bush (the US) winning is a greater evil than losing Iraq.
I think it is you who need to pay better attention to 1) what has been happening and 2) what was being discussed in this post.
Posted by: Tom at Sep 18, 2007 12:23:56 PM
But now y81 is back at his job in the bond market, having tired of explaining credit spreads to wingnuts.
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