Using Markets to Inform Policy

The Case of the Iraq War

Dados Bibliográficos

ID9723385
AutoresJustin Wolfers (0000-0001-7939-103X, Center for Economic and Policy Research), Eric Zitzewitz (Dartmouth College)
Ano2009
Volume76
Fascículo302
Páginas225-250
Data de publicação2009-04-01
Peer ReviewedSim
Open AccessSim
TipoARTICLE
PeriódicoEconomica (JOURNAL)
Identificadores do periódicoISSN: 0013-0427 • E-ISSN: 1468-0335
EditoraWiley (PUBLISHER • GB)
DOI10.1111/j.1468-0335.2008.00750.x
OpenAlexW2049227155
IdiomaEN
Citações recebidas10
Referências citadas29

Financial market‐based analysis of the expected effects of policy changes has traditionally been exclusively retrospective. In this paper, we demonstrate by example how prediction markets make it possible to use markets to prospectively estimate policy effects. We exploit data from a market trading in contracts tied to the ouster of Saddam Hussein as leader of Iraq to learn about financial market participants' expectations of the consequences of the 2003 Iraq war. We conducted an ex‐ante analysis, which we disseminated before the war, finding that a 10% increase in the probability of war was accompanied by a $1 increase in spot oil prices that futures markets suggested was expected to dissipate quickly. Equity price movements implied that the same shock led to a 1.5% decline in the S&P 500. Further, the existence of widely‐traded equity index options allows us to back out the entire distribution of market expectations of the war's near‐term effects, finding that these large effects reflected a negatively skewed distribution, with a substantial probability of an extremely adverse outcome. The flow of war‐related news through our sample explains a large proportion of daily oil and equity price movements. Subsequent analysis suggests that these relationships continued to hold out of sample. Our analysis also allows us to characterize which industries and countries were most sensitive to war news and when the immediate consequences of the war were better than ex‐ante expectations, these sectors recovered, confirming these cross‐sectional implications. We highlight the features of this case study that make it particularly amenable to this style of policy analysis and discuss some of the issues in applying this method to other policy contexts

Derivatives market · Economics · Emerging markets · Equity (law) · Ex-ante · Exploit · Financial economics · Financial market · Futures contract · Futures market · Macroeconomics · Monetary economics · Political science · Sample (material) · Shock (circulatory) · Spanish Civil War · Finance · Financial Markets and Investment Strategies · Financial Risk and Volatility Modeling · Market Dynamics and Volatility