N°26-67: Financial Innovation and Speculative Expansion: Evidence from Polymarket

When a prediction market lists a new claim that separates a state previously bundled into an existing claim, investors can reallocate positions, share risk, or expand speculative exposure. Using investor-level positions on Polymarket, we trace these responses. Positions in existing markets increase after related listings, and new investors account for most of the increase. Among prior holders, amplification dominates, with the majority of the exposure in the new claim reinforcing existing bets that were maintained or increased. Finer-state speculation and substitution also occur, while risk-reducing hedging is rare. Within Polymarket, the evidence favors speculative expansion over risk sharing under disagreement.