Resolution-Aware Perpetual Futures on Binary Prediction Markets: An Empirical Risk-Design Framework Using Polymarket Data

Paper: arXiv 2605.10400

Authors: Maksym Nechepurenko

Abstract

We develop and counterfactually evaluate a resolution-aware risk-design framework (PIRAP) for perpetual futures whose underlying tracks a single binary prediction-market probability through resolution. The framework specifies six components: an index estimator combining mid-price, depth-weighted mid, and time-decayed VWAP; jump-aware tiered margin sized against bounded-event terminal-collapse magnitude; leverage compression schedule contracting toward resolution; resolution-aware funding rule with boundary-aware correction; a multi-stage halt protocol; and an eligibility framework. Two formal non-portability propositions establish that standard basis-only funding paired with continuous-vol static margin fails on bounded-event underlyings. Empirical evaluation uses Polymarket’s PMXT v2 archive for 2026-04-21 to 2026-04-27 (13,298-market analysis sample passing adequacy gates from 61,087 ingested; 13,115 resolved within the empirical window for E3). E1 evaluates two pre-registered stylized facts; E2 conducts counterfactual replay across three engine configurations; E3 isolates the resolution-zone protocol’s contribution. Results are mixed. Five pre-registered floors: stylized-fact floors (boundary depth asymmetry, terminal-jump magnitude) PASS; welfare-side directional floors (final-hour liquidation -6%, drawdown -5.1% pooled, median PnL +14%) two FAIL one PASS; E3 mechanic floors (final-hour liquidation -80% by halt construction PASS; bad-debt frequency +2.4% FAIL). Three of five materiality floors fail: the framework as specified does not validate deployment, but the empirical record establishes a halt-versus-margin scope distinction (halt addresses execution-channel risk; terminal-jump bad-debt remains margin-side) and documents a pre-emption trade-off constraining the dynamic-margin component. The paper concludes with structural recommendations and explicit non-deployable status.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 9.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper combines formal, proof-based mathematical propositions regarding non-portability and risk architecture with a massive-scale (13,000+ market) empirical counterfactual backtest using proprietary tick-level data. The methodological framework is exceptionally rigorous, utilizing pre-registered falsifiability thresholds and sophisticated, data-driven engine simulations.

Research Flowchart

  flowchart TD
    A[<b>Goal:</b> Develop & Evaluate PIRAP Framework for Binary Prediction Market Perpetuals] --> B[<b>Data:</b> Polymarket PMXT v2 (13,298 Markets)]
    B --> C[<b>Method:</b> PIRAP Framework (6-Component Design)]
    C --> D[<b>Processes:</b> Counterfactual Replay & E1-E3 Evaluation]
    D --> E[<b>Outcomes:</b> Failed Deployment Validation; Trade-off Identification]
    E --> F[<b>Conclusion:</b> Non-deployable Status & Structural Recommendations]

Cited References (44)

1. Prediction Markets (2004) — link
2. Interpreting the Predictions of Prediction Markets (2006) — link
3. Results from a Dozen Years of Election Futures Markets Research (2008)
4. Logarithmic Market Scoring Rules for Modular Combinatorial Information Aggregation (2003)
5. Continuous Auctions and Insider Trading (1985) — link
6. Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders (1985) — link
7. Fundamentals of Perpetual Futures (2024) — link
8. Arbitrage in Perpetual Contracts (2025)

0 of 44 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.