TLDR Tech / Crypto
Institutional Risk Transfer via Prediction Markets
A 90-page working paper applies Hayek's spontaneous order framework to argue that prediction markets are structurally superior to traditional derivatives for pricing binary risk at an institutional scale. It quantifies the 'Vega Wedge,' the total cost gap between the two, as the sum of variance risk premium, Basel III dealer balance sheet costs, and replication friction from constructing binary payoffs via multi-leg positions. The Wedge runs ~0.7% on FOMC rate contracts and widens to 2-4% for contested elections and emerging market central bank decisions, where prediction markets price the same exposure in a single contract at a single price.
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