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Liquidity Provision And Cross Arbitrage In Continuous Double-Auction Prediction Markets

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  • Werner Antweiler

Abstract

Continuous double-auction prediction markets often exhibit low transaction volume due to substantial bid-ask spreads. This paper explores a novel method of providing artificial liquidity in continuous double-auction prediction markets by introducing an automated market maker that engages in zero-profit cross-arbitrage in multi-contract markets. Empirical analysis of observed bid-ask spreads, liquidity, offer acceptance, and order sizes in the 2008 UBC Election Stock Market provides additional new insights into the micro-structure of prediction markets.

Suggested Citation

  • Werner Antweiler, 2013. "Liquidity Provision And Cross Arbitrage In Continuous Double-Auction Prediction Markets," Journal of Prediction Markets, University of Buckingham Press, vol. 7(3), pages 61-86.
  • Handle: RePEc:buc:jpredm:v:7:y:2013:i:3:p:61-86
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    Keywords

    prediction markets; liquidity;

    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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