Portfolio Update and 2024 Views
Happy New Year!
2023 was an exciting year for writing about prediction markets. Devoted blog readers will recall that prediction markets correctly foresaw record global temperatures before official government models, matched the accuracy of major banks on inflation forecasts, and continued to produce completely irrational political odds.
More recently, Kalshi has done a good job of quickly putting up markets on major news stories: Ivy League President Removal, Kanye Album Release Date, Result of NY Times Open AI Lawsuit.
Year-End Portfolio Update
I closed the year up 26%, with gains driven by taking opposite positions in prediction markets and financial markets. Interestingly, my prediction market accounts registered slight losses while financial markets gained. That relative performance diff was mostly driven by arbitrage luck, but also by some ill-fated forays into climate betting (never again).
Review of Strongest Views Going Into 2024
Most of my edge comes from identifying “light arbitrage” opportunities between markets; however, I do occasionally have strong unhedged, directional views. Looking ahead to 2024, my strongest views relative to market consensus are ones I’ve expounded on in previous posts:
Biden is undervalued, especially for the Democratic primary:
Political Betting Markets: Beautifully Inefficient
·I agree with Nate Silver that the betting odds for the 2024 election seem crazy: Trump (80%) and Biden (70%) are grossly underpriced to win their respective nominations. They enjoy dominant polling leads and the clock is running out. In fact, the pricing seems so detached from reality I have been contemplating a spring vacation to London, where betting …
A recession is not as likely as forecasters and bettors think. Betting “NO” on recession is a also a great combination bet with buying puts on the Nasdaq-100.
Constructing a Portfolio of Bets for 2024
Consider the following questions, each represented by at least one market: Who/which party will win the Presidential Election in 2024? Markets: Betfair (UK), Smarkets (UK), Polymarket (ex-US), PredictIT (US) Will there be a recession in 2024? Market:
Speaking of the Nasdaq-100, it’s a historically volatile index that is priced to not be that volatile over the next year. Prediction markets and equity options markets put the odds of a 30% decline in that index at below 10%.
In the 24 years of the Nasdaq-100’s existence, it has moved more than 30% (absolute value) 12 times, which is a 50% probability. If you thought that a 30% decline is as likely as a 30% gain, you might think true odds of a 30% decline are closer to 25% than the <10% priced. Then again, retail investors historically lose a lot of money trading options, so maybe market-makers and options trading pros have their reasons.
The Blog in 2024
Looking ahead to next year, I want to do more quantitative modeling that I think people on “Econ twitter” will find interesting. I hope this will lead to some free publicity for the blog. Econ Twitter is not my true home though; I feel most at home among the gamblers, and I’ll continue to bring coverage of the most zany, degenerate markets on the planet.