Prediction Markets and Election Polling: Granger Causality Tests Using InTrade and RealClearPolitics Data

Abstract

This study tests for direct causality between RealClearPolitics (RCP) polling averages and InTrade (IT) share-prices by performing Granger causality tests. These tests are applied to the 2012 U.S. presidential election campaign between Barack Obama and Mitt Romney. Three time series are considered in this analysis of causal links between RCP and IT. In all of the estimations, the null hypothesis that IT does not Granger cause RCP cannot be rejected. On the other hand, the null hypothesis that RCP does not Granger cause IT is rejected in a majority of cases. Overall, these results imply that RCP Granger causes IT. While the behavior of participants in prediction markets such as InTrade is informed by political polling, these Granger causality test results suggest that prediction markets add little to what is forecasted by the polls, particularly aggregation polls such as that from RealClearPolitics, regarding the outcome of presidential elections.