Types of Prediction Markets

Published by Mario Oettler on

Prediction markets can be categorized by their types of contracts.

Binary contracts: The most common contract is a binary contract. There are two mutually excluding outcomes. If outcome A occurs, the A share receives 100% of the payment. If outcome B occurs, share B receives the full payout. The resulting price for share A is the aggregated probability of outcome A.

Index contracts: Index contracts try to predict a certain number. These could be sales figures, for example. Here, the price is multiplied by a suitable factor (multiplier). The result is the predicted value. Price = 0.45, multiplier = 10,000, predicted sales = 4500.

Combinatorial contracts: Combinatorial contracts allow trading multiple contracts. The trader can specify how many shares on a certain contract he wants to buy or sell.

Conditional contracts: With conditional contracts, the value depends on a condition. An example is how many cars get sold if the oil price is between 50 and 60 US-Dollar.