(In)accuracy of a political stockmarket: the influence of common value structures

This paper presents the results of a political stock market in the Netherlands: PAM94. The exchange covered three consecutive elections, allowing trade on five different markets. The predictions at PAM94 appear to be less accurate than those of previous markets of comparable size. Of the possible explanations that we examine, one in particular survives closer scrutiny. It concerns a type of judgement failure related to the winner's curse in common value auctions. Theoretical as well as empirical support is offered. Apart from qualifying the attractiveness of such markets as an alternative for opinion polls, this explanation may also be relevant for the analysis of other asset markets. Moreover, this judgement failure may be more important for European political stock markets than for the U.S., because the structure of the common values (vote shares) at multiparty elections make them especially vulnerable to it.