CEMay 29

When Certainty Is Not Worth It: Capital Lock-Up and Settlement Discounting in Prediction Markets

arXiv:2605.3143191.2
AI Analysis

This research is significant for participants and designers of prediction markets, as it reveals that pricing quality is endogenous to settlement mechanics, collateral productivity, and capital-recycling design, impacting how information is aggregated.

This paper investigates the impact of capital lock-up and settlement delays on pricing in collateralized prediction markets. It finds that prices embed a maturity-dependent settlement discount, summarized as an annualized settlement wedge (ASW), which is positive, maturity-dependent, and time-varying. Adjusting prices by these curves reduces the near-certainty horizon gradient by 48-88%.

Collateralized prediction markets are contingent-claim markets in which economic uncertainty can disappear before winning claims become redeemable. This paper studies the pricing effect of that delay. When collateral remains locked until oracle settlement, a near-certain dollar is a delayed dollar, so prices embed a maturity-dependent settlement discount in addition to beliefs about outcomes. We recover an implied settlement-discount term structure from persistent near-certain contracts using realized settlement times and summarize it as an annualized settlement wedge (ASW). The recovered wedges are positive, maturity-dependent, and time-varying. Adjusting pricesby these curves reduces the near-certainty horizon gradient by roughly 48-88%, indicating that much of the raw maturity pattern reflects priced settlement frictions rather than forecast error alone. Market architecture changes the wedge: negRisk conversion compresses discounts by recycling part of the position into synthetic collateral, while yield-bearing collateral flattens the term structure by reducing the opportunity cost of lock-up. The results show that pricing quality in prediction markets is endogenous to settlement mechanics, collateral productivity, and capital-recycling design. Prediction-market prices therefore aggregate information through a financial infrastructure whose funding conditions are measurable and economically important.

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