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

TL;DR

This paper examines how prediction markets for the 2024 U.S. presidential election respond to political shocks, revealing varied price adjustments and trader behaviors linked to different types of events.

Contribution

It provides novel empirical insights into how prediction markets process political shocks, highlighting differences in price dynamics and trader reactions across events.

Findings

Trading volume increases after shocks

Price adjustments vary by event type

Trader behavior linked to pre-event exposure

Abstract

Using transaction-level trade data from Polymarket's 2024 U.S. presidential election market, we study how prediction markets process shocks. We analyze three events: the Biden-Trump debate, the assassination attempt on Trump, and Biden's dropout. Trading rises after each shock, especially among incumbent traders with pre-event exposure against a Trump victory, who are also more likely to flip positions. Price adjustment differs across shocks. The debate-induced price jump largely reverses, the assassination-attempt repricing persists, and Biden's dropout triggers two-sided trading with little net price change. These patterns link post-news price dynamics to liquidity and disagreement about how shocks map into election odds.