Tuesday, January 20, 2009

The Intrade 2009 Depression Contract

has a silly error:
[Intrade defines] "depression" thus:
For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters. This is calculated by adding together the published (annualized) GDP figures (as detailed below). If these annualised figures add up to more than -10.0% over four consecutive quarters then the contract will expire at 100.

Expiry will be based on official quarterly GDP figures reported by the U.S. Department of Commerce (Bureau of Economic Analysis, Table 1.1.1, "Percent Change From Preceding Period in Real Gross Domestic Product") as reported by the BEA.

The problem is that if you add four quarterly change-figures that are already each annualized, you will get a far larger cumulative result than the actual change over a four-quarter period. Suppose there are four successive quarters each showing an annualized 2.5% decline in GPD. Intrade will add those together and get 10%. But over the year, the annual decline in GDP will acually be 2.5%.
Intrade has listed a new contract to address the error: 2009.US.GDP.-10.0%

UPDATE: Here is Intrade's announcement.

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