prediction-markets-option-arbitrage

name	prediction-markets-option-arbitrage
description	Prediction market pricing benchmark methodology — comparing prediction market prices (Polymarket) with option-implied risk-neutral probabilities from centralized exchanges (Binance/Deribit). Use when analyzing prediction market efficiency, cross-venue price discovery, crypto derivatives pricing, market fragmentation effects, and speculative demand wedges.
metadata	{"arxiv_id":"2606.19517","published":"2026-06-19","category":"q-fin.TR"}

Prediction Market Option Arbitrage

Core Methodology

First benchmark test of prediction-market pricing efficiency by comparing Polymarket Yes prices with discounted risk-neutral binary values from listed call options on the same underlying, strike, and maturity.

Key Findings

• Mean pricing gap: 5.6pp (Polymarket vs Binance) across 214 hourly observations (t=6.46, p<10^-9)
• Pooled gap: 6.3pp across three Binance-compatible Bitcoin threshold markets (287 observations)
• Persistence: AR(1) half-life ~4 hours, yet mean-reverting → slow info transmission between segmented venues
• Cross-sectional pattern: Wedge largest at low option-implied probabilities and long maturities → speculative demand, not measurement error
• Deribit extension: Larger pooled gap of 11pp on same contracts; Ethereum exercise yields mixed evidence
• Arbitrage viability: Delta-hedged arbitrage proxy profitable after conservative transaction costs (marginal statistical precision)

Analysis Framework

1. Match sampling: Identify identical payoffs across prediction markets and option exchanges
2. Risk-neutral extraction: Compute binary option values from vanilla option surfaces
3. Statistical inference: HAC and block-bootstrap for time-series correlation
4. Cross-sectional analysis: Regress gap on probability level, maturity, volatility regime
5. Arbitrage test: Delta-hedged proxy with transaction cost bounds

Economic Interpretation

Persistent pricing wedges indicate market fragmentation rather than mechanical noise. Speculative demand for prediction market contracts (narrative-driven trading) creates systematic overpricing relative to professional derivatives venues.

Activation Keywords

• prediction market pricing, option-implied probabilities, market fragmentation, Polymarket, Binance options, price discovery, speculative demand wedge, crypto derivatives, cross-venue arbitrage