Tuesday, February 12, 2008

Clinton or Obama: Which Democratic Presidential candidate do the markets like in the general election?

Supporters of Hillary Clinton and Barack Obama both argue that their candidate is better equipped to beat the Republican nominee for President in a general election. Alex Tabarrok at Marginal Revolution first alerted me to the fact that when the Intrade political market contracts for Clinton and Obama to win the nomination were swinging wildly in response to Iowa and New Hampshire results, the contract price for the Democratic party nominee winning the Presidency remained calmly in the low 60s.

(For non-Intrade junkies: the price of the contract is for a share that will pay $100 if the contracted event comes true. That is, if you buy a share of the Democratic nominee for President at $65 and the Dem wins, you get $100, but if the Dem loses, you get nothing. Therefore, the price functions as the market's estimate of probability: a $65 price implies a collective judgment of a 65% probability of the Dem nominee winning the Presidency.)

Since Tabarrok made his post, the probability of the generic Democrat winning the general election has climbed above 65, but many factors could explain the move: Obama's shift to frontrunner status, McCain's emergence as the Republican nominee, increased worries about the economy relative to national security, and so forth. Therefore, I did a snapshot analysis earlier today that derives the answer to this question: according to the markets, would Obama or Clinton give the Democrats a better chance to win the Presidency?

To answer the question, we need the market's estimate that each candidate will win the party nomination and, separately, the estimate that each candidate will win the Presidency. At an arbitrary moment earlier today, the market gave Obama a 71.0% chance to win the nomination and a 47.2% chance to win the Presidency; for Clinton, the numbers were 29.0% and 18.3%, respectively.

The ratio of the second number to the first is the probability of winning given the nomination. Obama's number is 66.5%, Clinton's, 63.1%. Obama gets an edge at that moment, but I've seen moments over the last couple of days that give Clinton an even tinier edge. I would guess that overall, the market is signaling that it considers Obama the stronger nominee by a tiny margin. What's certain is that the market doesn't care much about the identity of the nominee.

Therefore, the supporters of either candidate who have made the case that their candidate has a clear advantage as a general election contender might want to step back and consider that the arguments put forth by the other side are equally persuasive to the bettors on Intrade. I have made such arguments in support of one candidate (Obama), so I include myself among those who might benefit from reflecting on this data.

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