Clarification of Depression Contract, please

Can you read and comment on this thread?

http://bb.intrade.com/intradeForum/posts/list/3291.page

Stewart and Brambster bring up some good points.

It seems to me that a drop as little of 2.5% on the GDP over the next 4 quarters could qualify as a 'Depression' under the contract rules.

That doesn't really jive with my idea of a Depression.

A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.
By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent.

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters.

This is calculated by adding together the quarterly GDP figures, and if they total more than -10.0% then the contract will expire at 100.

This is calculated by adding together the quarterly GDP figures, and if they total more than -10.0% then the contract will expire at 100.

Wow, I guess that resolves the ambiguity: So if the final BEA Table 1.1.1 numbers show quarterly declines of 3.0% over each of 08Q4, 09Q1, 09Q2 and 09Q3, the contract will expire at 100 (as 3.0+3.0+3.0+3.0=12, which is greater than 10), even though under these facts the annual gross domestic product shrank only about 3.0% for that 12-month period compared to the prior year (again, because the BEA quarterly GDP change is an annualized number).

That's a rather . . . unconventional . . . definition of a recession, but okay. In light of this, I agree with Brambster that this thing's really undervalued in the mid-teens, and I am making my decision to go long in reliance on this clarification of the rules.

I sense some future trouble for Intrade when the mass media is saying that a depression was avoided / isn't going to happen, and yet this contract is expiring at 100.

Intrade wrote:

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters.

This is calculated by adding together the quarterly GDP figures, and if they total more than -10.0% then the contract will expire at 100.

This does not clarify the contract and Intrade needs to settle this dispute once and for all. Adding together the quarterly numbers does no make any sense whatsoever while 10 % yearly decline is a used unofficial definition. If this is the highly illogical definition the rules should have used "percentage point" rather than "%". The word cumulative does not help only confuses.

Whats more the example cited in the contract rules still uses 10% decline in a whole year not this adding up buisness.

Lastly it highly disturbing that Intrade changes the contract rules without the previously used "clarification (date)". You cannot just change the original wording like that without leaving any trace of the original question.

Please make a unmistakeble clarification that reveals what the original meaning of the contract was

The contract rules published on the site for the Depression contract state that:

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters.

This is calculated by adding together the quarterly GDP figures, and if they total more than -10.0% then the contract will expire at 100.

So if we have the following...

Q1 -2.5%
Q2 -2.5%
Q3 -3.5%
Q4 -3.5%

...the total is -12.0% so the contract will be expired at 100.

Intrade wrote:

The contract rules published on the site for the Depression contract state that:

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters.

This is calculated by adding together the quarterly GDP figures, and if they total more than -10.0% then the contract will expire at 100.

So if we have the following...

Q1 -2.5%
Q2 -2.5%
Q3 -3.5%
Q4 -3.5%

...the total is -12.0% so the contract will be expired at 100.

There is still inconsistency in wording of the contract.

A "cumulative decline in GDP of more than 10.0% over four consecutive quarters," implies that the year over year figures show a decline of 10%.

The figures given on the referenced chart are annualized, meaning a 1% decrease in GPD over a quarter is reported as 4% (ignoring the adjustments for seasonality).

If the referenced chart has [-2.5, -2.5, -3.5, -3.5] as the _annualized_ change in GDP over four consecutive quarters, then the cumulative reduction in GDP will be about 3%.

If in fact this 3% cumulative reduction in GDP triggers a payout of 100, then the "Contract Specifics" are astonishingly misleading.

Please clarify which triggers payout:

1.) "cumulative decline in GDP of more than 10.0% over four consecutive quarters," as stated in one paragraph.

or

2.) summing four annualized (i.e. actual reduction times four) quarterly numbers from the referenced chart, as your above post implies.

Well, he clarified it. It's clearly going to be #2.

I have no position here, but this is a pretty ridiculous interpretation. It seems like whoever wrote the contract originally didn't realize that the quarterly numbers published by the government and widely reported in the media represent annualized change rates, not absolute change.

Does intrade realize that using this definition, we've had 3 Depressions since 1945?

More reason to open up new contracts for public comments for a day or two before beginning trading.

MrBob wrote:

There is still inconsistency in wording of the contract.

A "cumulative decline in GDP of more than 10.0% over four consecutive quarters," implies that the year over year figures show a decline of 10%.

The figures given on the referenced chart are annualized, meaning a 1% decrease in GPD over a quarter is reported as 4% (ignoring the adjustments for seasonality).

If the referenced chart has [-2.5, -2.5, -3.5, -3.5] as the _annualized_ change in GDP over four consecutive quarters, then the cumulative reduction in GDP will be about 3%.

If in fact this 3% cumulative reduction in GDP triggers a payout of 100, then the "Contract Specifics" are astonishingly misleading.

I absolutely agree. And it becomes even more misleading when there exist a definition of "depression" that states it is a one 10% decline in gdp (not an official definition of course).

But what is most misleading is this example from the contract rules:

"Negative quarters in the preceding year will count towards the total GDP decline for expiration purposes. For example, if the total decline in GDP from Q3 2008 to Q2 2009 exceeds 10.0% then the contract will expire at 100."

When I read the contract the first time I had some doubt as to the definition untill i read this example. Then I was convinced Intrade defined "Depression" as a 10 % decline in gdp. Not this rather strange definition they seem to actually mean.

I stand only to loose a 100 bucks from this so its not so much the money. Still I find the development of this case rather depressing and while I am generally very satisfied with Intrade I think they have done a very poor job this time

The answer to this post will clarify the contract.

There are two interpretations:
Interpretation A.
1. Pick any Q in 2009.
2. Now, 4 quarters/365 days/12 months previously, if the economy was 110/100 greater, the contract expires at 100.

Interpretation B.
1. Pick any Q in 2009.
2. The annualized reported change in GDP in each of the 4 quarters, up to an including the Q in 2009, as added up. If this is a total decline of 10%, then the contract expires at 100.

Scenario X.
Assume no change in GDP, in any previous quarter, ever. Now, the economy annualized delince is 5% in quarter 1, 2009, and then is another 5% in Q2. By interpretation B, the decrease in Q2 would satisfy the contract and cause it to expire at 100.

Otherwise, in interpretation A, the above actions does not cause the contract to expire, since the economy is actually changed by 5% over the 2 quarters.

So which interpretation is correct?

Another simple question that will clarify the contract:

Assume Q4 2008 shows no "cumulative change", (whatever it is that means to you!). Then, given the current data, what quarterly GDP figures will satisfy the contract to expire at 100?

Well from reading this thread it looks like Intrade has really blown its load and has a serious mess on its hands. There are clearly two very different definitions in the contract that are incompatible. The only one that seems to make sense to me is that there is a total decline of 10% over 12 months meaning 10% annualized for 4 quarters or something of that whereabouts. The clarification however suggests that 3% annualized over 12 months would count is a 10% reduction over a year. This means that the economy will not have shrunk by 10% but by 3% and yet this contract would expire at 100. I don't know exactly what Intrade was trying to do here but it's possible they don't know what annualized means or think 3%> 10%. If someone can think of another way to read their intentions here I'd appeciate it as they've clearly been no help. This must be the biggest intrade blunder yet though by far not the only one (see turnout rates, or Korea). I think Intrade needs to give serious consideration to hiring someone intelligent to design contracts so that these things don't keep happening. I love the site... but these kinds of rookie mistakes are killing me.

This whole problem hinges on the fact that people believe intrade is talking about annualized figures. Intrade never said this and it appears this confusion is self-inflicted.

Rashi, I disagree about the turnout rates. The definition there was clearly spelled out in the contract rules, though it didn't match the definition typically used in the media.

This is a message I sent to help@intrade.com:

"Just to be 100% clear on how this contract will be evaluated, let's say Q1, Q2, Q3, and Q4 2009 quarterly GDP figures are all -3.0%. Adding them together gives -12%, but, because the reported numbers are annualized, this would really represent a 3% annual decline in GDP. How would the contract be expired?"

I made it clear that the reported quarterly numbers are annualized. And their response:

"Thanks for your enquiry. Under the rules for this market the contract would expire at 100%. The contract rules state:

For expiry purposes a depression is defined as a cumulative decline in GDP of more than 10.0% over four consecutive quarters. This is calculated by adding together the quarterly GDP figures, and if they total more than -10.0% then the contract will expire at 100."

My guess is, they don't know what "annualized" means.