Financial Innovation and Speculative Expansion: Evidence from Polymarket

Ali Kakhbod, Dmitry Livdan, Bernardo Maciel and Norman Schuerhoff
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Ali Kakhbod: University of California, Berkeley
Dmitry Livdan: University of California, Berkeley
Bernardo Maciel: University of California, Berkeley - Haas School of Business
Norman Schuerhoff: Swiss Finance Institute - HEC Lausanne

No 26-67, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: When a prediction market lists a new claim that separates a state previously bundled into an existing claim, investors can reallocate positions, share risk, or expand speculative exposure. Using investor-level positions on Polymarket, we trace these responses. Positions in existing markets increase after related listings, and new investors account for most of the increase. Among prior holders, amplification dominates, with the majority of the exposure in the new claim reinforcing existing bets that were maintained or increased. Finer-state speculation and substitution also occur, while risk-reducing hedging is rare. Within Polymarket, the evidence favors speculative expansion over risk sharing under disagreement.

Keywords: Financial Innovation; Speculation; Risk Sharing; Prediction Markets; Incomplete Markets; Belief Disagreement; Text Analysis (search for similar items in EconPapers)
JEL-codes: D84 G11 G13 G14 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2026-09, Revised 2026-10
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2667

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