Saturday, January 24, 2009

More on Intrade Depression Odds

by Calculated Risk on 1/24/2009 12:24:00 AM

Earlier this week I noted that the Intrade method of calculating a depression was flawed.

I found out today that James Kwak at RGEMonitor noticed it before me: Betting on a “Depression” Kudos to James!

Now Intrade has added some more depression bets, including a 10% decline in nomimal GDP by the end of 2009. Jay Hancock, who blogs at the Baltimore Sun, points out these are flawed too: Intrade modifies depression bet, messes up again

[T]here are new depression bets, which Intrade couches in terms of absolute change in GDP dollar value rather than the rates that tripped it up before. ... But the rules are still problematic. In the new bet, Intrade will trace changes in nominal GDP instead of real, inflation-adjusted GDP. Nobody measures business cycles this way.
I guess they can't figure out how to explain a 10% real decline in GDP, so the bet is based on nominal GDP instead. Interesting - at least to nerds like me - is that the GDP price deflator could be negative in 2009, and therefore a 10% nominal decline in GDP could actually be less likely than a 10% decline in real GDP!