Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331588 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 12122
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
Since 2021, Kalshi has operated as the only federally licensed prediction market in the United States. Using transaction-level data on over 300,000 contracts, we provide the first systematic evidence on its pricing. Kalshi's contract prices are informative and improve in accuracy as markets approach closing, but they display a clear favorite–longshot bias: low-price contracts win far less often than required to break even, while high-price contracts win more often and yield small positive returns. We interpret these patterns with a simple framework that reflects Kalshi's quote-driven microstructure. Makers—relatively well-informed traders who post offers—seek positive expected returns but may be slightly over-optimistic, while Takers accept these offers. The model predicts distinct patterns of favorite–longshot bias for Makers and Takers, and the data confirm these predictions.
Subjects: 
prediction markets
Kalshi
favorite-longshot bias
market microstructure
bid-ask spreads
JEL: 
G14
G23
G40
Document Type: 
Working Paper
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