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Financial Innovation and Speculative Expansion: Evidence from Polymarket

Author

Listed:
  • 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)

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.

Suggested Citation

  • Ali Kakhbod & Dmitry Livdan & Bernardo Maciel & Norman Schuerhoff, 2026. "Financial Innovation and Speculative Expansion: Evidence from Polymarket," Swiss Finance Institute Research Paper Series 26-67, Swiss Finance Institute, revised Oct 2026.
    • Handle: RePEc:chf:rpseri:rp2667
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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