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Liquidity Provision and Cross Arbitrage in Continuous Double-Auction Prediction Markets

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. 


Keywords


prediction markets; liquidity

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References


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DOI: http://dx.doi.org/10.5750/jpm.v7i3.824

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