Has anyone seen good research on how prediction market liquidity relates to accuracy / calibration / etc.?
On a quick search I found Tetlock 2009 which found that liquidity doesn’t help:
I investigate the relationship between liquidity and market efficiency using data from short-horizon binary outcome securities listed on the TradeSports exchange. I find that liquidity does not reduce—and sometimes increases—deviations of prices from financial and sporting event outcomes.
Market microstructure analysis reveals significant accuracy improvements correlating with trading volume. Markets exceeding $100,000 in total volume achieve 84% accuracy, while those below $10,000 fall to 61%. This pattern reflects the efficient market hypothesis applied to prediction markets—adequate liquidity enables proper price discovery.
It seems intuitively obvious that it’d matter a bunch, but I’m wondering exactly how much liquidity I should be looking for in a market, and how much to trust small- or medium-sized markets.
‘Accuracy’ is not a great statistic imo (it just tells you about the direction, e.g. if you say 51% for something that happens you are ‘accurate’). Thankfully Polymarket publishes Brier scores. You can see that while liquidity helps, it’s already not bad for the lower liquidity buckets (.09 up to $10k, then .08 up to $25k, .07 up to $100k, .05 up to $250k, .04 up to $500k, .03 up to $1M, .02 for $1M+)
Calibration City https://calibration.city/ is also a great resource for looking into questions about calibration of various prediction market platforms!
Has anyone seen good research on how prediction market liquidity relates to accuracy / calibration / etc.?
On a quick search I found Tetlock 2009 which found that liquidity doesn’t help:
And then a more recent blog post analysis of Polymarket data finding that it does matter:
It seems intuitively obvious that it’d matter a bunch, but I’m wondering exactly how much liquidity I should be looking for in a market, and how much to trust small- or medium-sized markets.
‘Accuracy’ is not a great statistic imo (it just tells you about the direction, e.g. if you say 51% for something that happens you are ‘accurate’). Thankfully Polymarket publishes Brier scores. You can see that while liquidity helps, it’s already not bad for the lower liquidity buckets (.09 up to $10k, then .08 up to $25k, .07 up to $100k, .05 up to $250k, .04 up to $500k, .03 up to $1M, .02 for $1M+)
Calibration City https://calibration.city/ is also a great resource for looking into questions about calibration of various prediction market platforms!