A Prediction Market for Irish Toxic Assets?

Alan Holland of UCC has a paper proposing a prediction market to forecast prices for “toxic assets” to be transferred from Irish banks to the National Asset Management Agency (NAMA).

Abstract below and the full paper is available here.

Abstract

We propose the development of a prediction market for forecasting prices for ‘toxic assets’ to be transferred from Irish banks to the National Asset Management Agency (NAMA). Such a market allows market participants to assume a stake in a security whose value is tied to a future event. We propose that
securities are created whose value hinges on the transfer amount paid forloans from NAMA to a bank. In essence, bets are accepted on whether the price is higher or lower than a certain quoted figure. The prices of the securities indicate expected transfer costs for toxic assets and they increase or decrease in line with market opinion. Prediction markets offer a proven means of aggregating distributed knowledge pertaining to fair market values in a scalable and transparent manner. They are incentive compatible
(i.e. induce truthful reporting) and robust to strategic manipulation. We propose that a prediction market is run in parallel with the pricing procedure recommended by the European Commission. This procedure need not necessarily take heed of the prediction markets view in all cases but it may offer guidance and a means of anomaly detection. An online prediction market would offer everybody an opportunity to ‘have their say’ in an open and transparent manner.

5 thoughts on “A Prediction Market for Irish Toxic Assets?”

  1. the best of these is the Iowa electronic market. however, that has a derogation from the SEC to allow “real money” to be used. In the irish context the last futures market was IFOX (remember?) which died from lack of liquidity.
    The paper is a useful starting point but several issues remain unanswered
    # insider trading
    # clearing house opertation and liquidity
    # tax treatment of profits and stakes

    See also http://www.independent.ie/business/world/the-market-for-political-futures-477434.html
    and
    http://www.independent.ie/business/if-you-want-to-pick-an-election-winner-look-to-the-futures-136540.html

  2. Intrade.com is one of the worlds largest prediction market makers and is based in Dublin. I believe that insider trading, clearing operations and tax treatments are very surmountable challenges in a potential implementation. Liquidity issues need a more careful treatment and incentives for market entry and additional rewards for accurate predictors should be considered. Given the enthusiasm of the masses to have their voice heard on this issue, it may be a case of pushing an open door. This would be an extremely cost-effective means of harnessing the ‘wisdom of crowds’.

  3. Some comments:

    1. “Invited participants in the market will be offered an opportunity to wager on the transfer prices of toxic assets.” The transfer price will be set by a bureaucrat working for NAMA. A 15% discount relative to book value seems to be a popular prediction with stockbroking economists and their explanations for these predictions have little to do with asset valuation. So good predicting here has little to do with aggregation of information about the underlying value of the assets.

    2. A better market would be involve betting on the final value of assets owned by NAMA–at least that’s getting at useful information rather than guessing what the bureaucrats are going to do—but this would be difficult to define and follow over time and it would take years before we would have an answer.

    3. Assessing the value of the NAMA loans is way more complicated than the unfinished house example in Alan’s paper. Most of the loans relate to large development projects and LTV rates vary widely.

    The technology Alan is setting up could be used to generate a prediction market for Irish house prices, perhaps based on the ESRI-PTSB index. This would be useful—the futures market on the Case-Shiller index is often referred to in the US. And it would be a useful input into a NAMA process if it was available now. However, as currently proposed, it is neither useful as an input into the NAMA process nor of general interest.

Comments are closed.