Saturday, July 01, 2006

TradeSports Futures Market -- Bird Flu USA

TradeSports has initiated a futures market for the time of arrival of Asian Avian Flu in the USA. The values of these contracts (as well as open volume and traded contracts) will vary over time, but as of this writing (7/1/06) there are three contracts:
  • Sept06 bid= 22.5 offer=22.8
  • Dec06 bid=40.5 offer=43.8
  • Mar07 bid=50.5 offer=59.9

The contract specifies "Asian Bird flu to be confirmed in the U.S." but as a contract specification, this really is a bit too imprecise. Still, if we accept the spirit of the specification, we can interpret this as "confirmation of H5N1 virus in US domestic or wild fowl or in other species, including man." The triggering event for this contract is most likely to be via wild fowl.

If the markets are efficient and informed (unbiased), then the suggested probability of the triggering event is approximated by the average of the bid and offer.

Unfortunately, the open interest in these contracts is small, so it seems that these contracts have not yet attracted an informed following. Thus, their use as a predictive tool is limited, even for those individuals who regard futures contracts as the gold standard for probability predictions.

Nevertheless, the inferences are still interesting, and the quality of the estimates can be expected to grow with the size of the market, or at least that is the conventional wisdom that emanates from Chicago.

What Does the Time Series Tells Us?

Those clever folks at TradeSports know that data generates business, so they happily provide a nice graph of the time evolution of the contract prices. Part of the decay in the value of this contract is from the approach of the expiration, but the decay is larger than I would have expected from such a time effect.

One seat-of-the-pants inference is that around the middle of May the market sharply revised its view of likelihood of a triggering by Sept 30. Can anyone make the link to why this revision (if real) took place?


Blogger Dan McCarthy said...

Southeast Asia, where H5N1 originated, reporting no new human cases in the trailing twelve months on May 15th, the approval of generic Tamiflu, or confidence surrounging Bush's implementation plan for the outbreak?

4:48 PM  
Blogger gs said...

they have a forum with a bird-flu thread. See here:

5:49 AM  

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