Another NGDP futures market
Things are progressing quite nicely with iPredict, and I hope to be able to ask donors to send their checks out within a couple of days. We have found a branch of Victoria University in the US, which is registered to accept donations that are tax deductible for Americans (I believe it’s called a 501(c)3 organization?) Right now I am trying to determine exactly how much I will ask each person to contribute to that entity (i.e. what fraction of their original offer is needed.) The money will all go to the iPredict NGDP markets.
Americans won’t be able to trade in iPredict, but another site I’ve been in communication with has listed a NGDP growth rate contract for the 3rd quarter of 2014 (a NGDP number that won’t be announced until October 30, 2014.) This site is called “Hypermind,” and differs from other prediction markets in that traders do not put up their own money. Instead their accounts are measured in “Hypermoney” (H), however at the end of a specified period the best performers do get monetary rewards, such as Amazon gift certificates. Here is the description of the new contract:
What will be the annualized growth rate of U.S. Nominal GDP in Q3 2014?
The value of each NGDPUS14Q3 share will be determined as follows:
10â„ * (annualized 2014:3 rate of nominal GDP growth, expressed as a percentage)
Or: 0â„ if nominal GDP falls in 2014:3.
Or: 100â„ if the annualized nominal GDP growth exceeds 10% in 2014:3.
The final share price will be based on the “advance estimate” of nominal GDP growth. This nominal GDP announcement will occur at 8:30am on October 30, 2014. All of the information used to calculate the growth rate will appear in the BEA website, Table 1.1.5, line 1:
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5
The growth rate will be calculated in two steps. First the quarterly growth rate will be calculated, using October 30, 2014 estimates of both Q2 and Q3 nominal GDP:
QGR = (Nominal GDP in 2014:3 – Nominal GDP in 2014:2)/(Nominal GDP in 2014:2.
The quarterly growth rate will be annualized as follows:
Annualized nominal GDP growth equals [(1 + QGR)^4 – 1] * 100
Note that the annualized nominal GDP growth rate is expressed as a percentage (not decimal.) It is then rounded off to the nearest tenth of a percent.
For example, if nominal GDP grew from $17.328 trillion (in Q2) to $17.5 trillion in Q3, then the annualized growth rate (including compounding) would be 4.03%, rounded to 4%, and the final price of the NGDPUS14Q3 share would be 40â„.
Finally, beware that the Q2 estimate that will be used in the calculation is the one that will be published on October 30, which may be different from the current estimate of $17.328 trillion.
They also sent me the following description of Hypermind:
About Hypermind
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Hypermind is a US-based prediction market that features mostly geopolitical, political and economy/business questions. It is not a gambling venue because participation is free (play-money), but significant rewards are given out based on performance. Questions are grouped into contests that feature their own reward amounts, so one may choose to participate in all contests, or in just those that appeal to their narrow interests. Currently, the total reward amount in play is over $17,000.
Hypermind is a pure Continuous-Double-Auction market, with a trading engine similar to Intrade, except that there are no trading fees. Trading is zero-sum and frictionless. Contracts are priced [0,100] (in play money) with payoffs that can be continuous (e.g., vote-share) or binary (e.g., winner-take-all).
Participation to Hypermind is by invitation only. There are upwards of 500 participants, most of which have been recruited among the top traders in various prediction markets operated in France and the USA by NewsFutures and Lumenogic between 2000 and 2014. It is an elite panel of expert prediction traders recruited and rewarded solely based on performance. It is a highly educated group of professionals in all walks of life, with 65% Masters or Ph.D. degrees, and another 20% college degrees.
Proposal
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I propose to implement your NGDP contracts on Hypermind in a dedicated contest, or series of contests, featuring its own cash prize of an amount of your choosing. Hypermind will operate the market for free, so you only have to put up the prize money.
For distributing the rewards themselves, based on a performance ranking at the end of the contest, there are 2 possibilities: (1) you take care of it; (2) Hypermind takes care of it. In the second case, you would give us the money and we would distribute it, when the time comes, in the form of Amazon Gift Certificates. If Amazon GC is unpalatable to your traders, we can explore other forms of rewards – TBD.
For your readers to participate, they will have to register to the Hypermind website. This means providing personal information such as email address, name, etc., and some basic demographic info such as education level, year of birth, gender, etc. But no financial or banking info of any kind. Since participation is invitation-only, they will first have to request an invitation, then they will receive an account activation link by email. Filling out the registration form just takes a minute.
Demo
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The Nominal GDP 2014:3 contract that you specified is now live on http://hypermind.com (please use this exact address) with a dedicated contest featuring a minimal $126 prize (100 €). There is already some trading going on. But to check out this market, your readers will need to register to Hypermind first. [I fixed the link]
They used Skype to show me the site, and it really is very easy to register, despite requiring two steps (request for invitation, then filling out a short form.) And of course no financial info needed.
I was thinking of starting off with 6 contracts at Hypermind; quarterly NGDP growth rates for 2014:3, 2014:4, 2015:1, 2015:2, and 2015:3, as well as an annual growth rate contract for 2014:4 to 2015:4. There would be $1000 prizes for each quarterly market, and a $5000 prize for the one year contract. Total cost would be $10,000. Unfortunately, everything in America is absurdly complicated. In this case there is just one problem—there is no non-profit for donors to donate to. Hypermind is a for-profit entity. Does anyone know a method by which donors could contribute to this sort of experiment in a way that was tax deductible in the US and also 100% shielded from liability? Or at the very least 100% shielded from liability?
The 2014:3 contract is already up and running, but we could obviously do much better with more than 100 euros in prize money.
Once I figure out what we are going to do with Hypermind, I’ll be able to tell each donor how much of their donation would be needed for iPredict. If we can’t resolve this in a couple days, we may just go ahead with iPredict, and try to resolve Hypermind later. My long term goal is to encourage Americans to trade NGDP at Hypermind, and non-Americans to trade NGDP at iPredict.
Tags:
13. October 2014 at 14:36
Awesome!
13. October 2014 at 15:10
If you get both markets up, it’ll be interesting to see if there ends up being arbitrage between the two.
13. October 2014 at 18:26
What is the benefit to the economy of greater accuracy in NGDP forcasting? Wouldnt it be fine if the fed just targeted its own internal NGDP forecast?
13. October 2014 at 19:34
@CMA: One benefit, is that the Fed is not, in fact, targeting their own internal NGDP forecast. So a public NGDP forecast is more useful for outsiders who wish to criticize various Fed actions. (In other words, it’s a tool to change the minds of those in the academic economics profession; it is not [necessarily] a tool for the Fed to do its job better.)
14. October 2014 at 00:04
CMA’s question reminded me of a related question. Which leads to greater macroeconomic stability (defined as, say, fewer and shallower demand-side recessions or more stable employment and inflation): (1) a stable path of actual NGDP or (2) a stable path of market expected NGDP? It seems like market participants make hiring and spending decisions based on their own expectations so that the Fed might want to target market expected NGDP rather than the Fed’s own forecasts simply because market expected NGDP may be more relevant.
Here is a thought experiment. Suppose the Fed knows about a future NGDP shock, but the market does not. For example, the Fed has insider information that the government is planning some fiscal stimulus that will be more inflationary than the Fed wants. Should the Fed move to offset the fiscal stimulus immediately or wait until the public learns of the planned stimulus? If the Fed were to raise rates immediately, couldn’t that cause a recession during the period before the public learned of the planned fiscal stimulus?
14. October 2014 at 07:44
Garrett, Good point.
CMA, The internal forecast would be OK, as long as it’s level targeting. If growth rate targeting then the market forecast is far better.
Also read Don’s comment. A NGDP futures market is really useful to academics even if the Fed doesn’t target NGDP.
BC, I think actual NGDP would be better, if it could be accomplished,. But as a practical matter targeting expected NGDP is probably the best they can do (I assume rational expectations and no insider information.) Fiscal stimulus is almost never secret.
14. October 2014 at 07:54
Vox has an article out on your NGDP futures market.
http://www.vox.com/2014/10/14/6969645/gabe-newell-ngdp-targeting-scott-sumner-futures-market-new-zealand
When I read the headline I thought Scott was a billionaire. Maybe some day, Scott.
14. October 2014 at 12:03
Cliff Asness’s influential forecasts need to be critiqued / rebutted by a Market Monetarist……
http://fortune.com/2014/09/18/its-the-worst-possible-time-to-buy-stocks
http://www.realclearmarkets.com/articles/2014/10/14/my_qe_mea_culpa_will_not_make_paul_krugman_polite.html
14. October 2014 at 12:52
Scott, have you seen this site? Not exactly a true NGDP futures market, but it seems to be market based and real time.
Thought you might appreciate it.
http://efficientforecast.com/
14. October 2014 at 14:38
Vivian, I wish that too!
TravisV, The first article says:
“But the evidence clearly shows that the worst time to buy stocks is when rates are already at extreme lows. ”
So 1933, 2003, and March 2009 were the worst time to buy stocks?
Andrew, Yes, I saw that earlier–a sort of hybrid forecast technique.
15. October 2014 at 18:18
Scott,
Where and when could I donate or invest to help setup the NGDP futures market you and others are working on?
This is very exciting stuff!
Best,
David L
16. October 2014 at 10:03
Thanks David, I’ll let you know–hopefully soon.
16. October 2014 at 23:44
Hi Scott (and everyone else),
I just wanted to toss my two cents in and mention that I don’t think it’s important that donations be tax-deductible. Are people really going to back out if they have to donate post-tax money instead of pre-tax money?
A tax deduction for donors would be nice, but is not necessary (in my opinion).
17. October 2014 at 05:47
Ted, No, but I’d like them to be tax deductible if possible. But we have that now for iPredict, we just can’t get them to tell us where to send the money.