Publication Type
Working Paper
Version
publishedVersion
Publication Date
6-2026
Abstract
Prediction markets increasingly list contracts settling on an asset price that holders can move by trading the underlying. We build a model showing that such contracts transfer wealth from prediction-market liquidity traders to manipulators and harm price discovery in the underlying, even as it becomes more liquid. After the launch of Polymarket's five-minute Bitcoin contract, settlement-time spot order flow spikes, causing large price reversals after settlement. Manipulators capture a large amount of profit, mostly from retail. Manipulation is largely absent in the fifteen-minute contracts: lengthening the contract horizon removes it, providing the market-design remedy our model and evidence support.
Keywords
Settlement Manipulation, Prediction Market, Market Liquidity, Price Discovery, Kalshi, Polymarket
Discipline
Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
134
Identifier
10.2139/ssrn.7028398
Citation
DAI, David; JIA, Ruizhe; and YU, Shihao.
Settlement manipulation in prediction markets. (2026). 1-134.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7913
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.7028398