Futures

So, all the volatility in the futures on candidates has made me think there's so little trading at this that these may have more arbitrage opportunities than I previously thought. For instance, take the futures on the probability of a recession in 2008. Intrade has that currently trading at 63.5 at of right now. So, the other day I looked at the fine print for this contract, as I realized I really didn't know how this thing would pay out. Would it pay out, for instance, if actual output fell below potential output, which is an estimated trajectory? Would, for instance, a slow growth recession count as a recession? Would they use the NBER business cycle dating group to determine if and a recession occurred? Turns out, they're using the more journalistic definition: two consecutive quarters of negative economic growth. Now, I'm sufficiently paranoid and pessimistic about the economy for a host of reasons. One of them is I'm teaching macro this semester, which tends to get me putting my business cycle hat on. The other is we're selling a house (unsuccessfully). Together, I get worried, looking at employment data, etc. But, I actually don't believe two consecutive quarters of negative growth is going to happen. I privately put that probability at closer to 30%, but the probability of a slow growth recession very high. Today I see that the CBO forecast for 4th quarter to 4th quarter 2007 to 2008 is 1.6. Now, that's consistent with negative growth over two periods, but you'd need some pretty sizeable growth in the other two to generate that, and I'm not confident about either direction. Plus, interest rates are going to be falling heavily soon and a fiscal package is coming through. So, when I get my act together, I may put some of my hard earned money into that contract and bet against it. I already am kicking myself for not making a million dollars on the McCain contract (it was trading at 7 not two months ago!). But I'm going to go out on a limb and say that the probability of two consecutive quarters of negative growth is way, way below 63.5%. A recession, sure. But a recession has many dimensions, and the newspaper definition isn't even the ones that economists use. I'm going to take the position that people are correctly pessimistic, but incorrectly forecasting the magnitude, and short this contract. At least, I think it's called shorting.