(In)accuracy of a European political stock market: The influence of commonvalue structures

This paper presents the results of a political stock, market in the Netherl ands: PAM94. The exchange covered three consecutive elections, allowing tra de on live different markets. The predictions at PAM94 appear to be less ac curate than those of previous markets of comparable size. Of the possible e xplanations that we examine, one in particular survives closer scrutiny. It concerns a type of judgement failure related to the winner's curse in comm on value auctions. Theoretical as well as empirical support is offered. Apa rt from qualifying the attractiveness of such markets as an alternative for opinion polls, this explanation may also be relevant for the analysis of o ther asset markets. Moreover, this judgement failure may be more important for European political stock markets than for the U.S., because the structu re of the common values (vote shares) at multiparty elections make them esp ecially vulnerable to it. (C) 2000 Elsevier Science B.V. All rights reserve d. JEL classification: C93; D82; G1.