Political Shocks and Price Discovery in Prediction Markets: Evidence from the 2024 U.S. Presidential Election

2026-03-03

AI Summary

This study investigates how political shocks affect price discovery in prediction markets. Leveraging tick-by-tick trading data from Polymarket’s 2024 U.S. presidential election contracts and precisely timestamped political events, it pioneers the integration of high-frequency trading dynamics with the microstructure of political shocks. Employing a Kyle-type price impact model, Glosten–Harris decomposition, variance ratio dynamics, and a bounded two-sidedness index, the analysis reveals heterogeneous market responses across shock types: debates induce transient price pressure followed by partial reversal, assassination attempts trigger persistent repricing, while candidate withdrawals—despite high trading volume—elicit minimal price movement, reflecting heightened Knightian uncertainty and divergent market beliefs.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Reasoning under Uncertainty: Other Foundations of Reasoning under Uncertainty
• Machine Learning: Calibration & Uncertainty Quantification

Application Category

• Economics, Online Markets and Human Computation: The sharing economy
• Security and Privacy: Large-scale security measurements
• Social Networks and Social Media: Media and governance, opinion dynamics, filter bubbles, polarization

Abstract

Using transaction-level matched trades from Polymarket's 2024 U.S. presidential-election contracts, we study how prediction markets process major political shocks. We focus on three events with precise timestamps: the first Biden-Trump debate, the Trump assassination attempt, and Biden's drop out. We document large bursts of activity on both extensive and intensive margins, concentrated among high-intensity incumbents, and show that pre-event net exposure predicts abnormal post-event trading and position flips. To link order flow to prices, we estimate a Kyle-style price-impact measure and a Glosten-Harris decomposition that separates permanent from transitory order-flow effects, complemented by variance-ratio dynamics and a bounded two-sidedness index. Across shocks, price discovery differs sharply: the debate exhibits stronger transitory pressure and partial reversal, the assassination attempt features a more permanent repricing, and the drop out episode combines heavy trading with muted net price changes and high two-sidedness, consistent with disagreement under Knightian uncertainty.

Problem

• prediction markets
• political shocks
• price discovery
• order flow
• Knightian uncertainty

Innovation

• prediction markets
• price discovery
• order flow decomposition
• Kyle model
• Knightian uncertainty