Worst News of the Day

The market at Intrade is predicting a probability of a U.S. Depression (10% or greater decline in GDP) in 2009 to be 56%.  I am shocked.  The probability is up significantly over the past two weeks.  Why?

Addendum: MR Readers are fast!  Within two minutes Marc points us to this post from Donald Luskin who says that it is a contract error.  Here is the key clause from the contract:

For expiry purposes a depression is defined
as a cumulative decline in GDP of more than 10.0% over four consecutive
quarters [that sounds ok, AT]. This is calculated [here is the error] by adding together the published
(annualized) GDP figures (as detailed below). If these annualised
figures add up to more than -10.0% over four consecutive quarters then
the contract will expire at 100.

As Luskin notes

The problem is that if you add four quarterly
change-figures that are already each annualized, you will get a far
larger cumulative result than the actual change over a four-quarter
period. Suppose there are four successive quarters each showing an
annualized 2.5% decline in GPD. Intrade will add those together and get
10%. But over the year, the annual decline in GDP will acually be 2.5%.

Thanks readers, I was about to open an Intrade contract to bet heavily against!

Hat tip to Tim Groseclose.


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