The Signal Credibility Index for Prediction Markets: A Microstructure-Grounded Diagnostic with Weighted and Time-Varying Extensions

Paper: arXiv 2604.27041

Authors: Maksym Nechepurenko

Abstract

Prediction-market price moves are widely treated as informationally equivalent: a price jump is read the same way regardless of whether it reflects durable Bayesian updating, transient liquidity pressure, strategic position adjustment, or genuine disagreement. This paper formalizes the Signal Credibility Index (SCI) introduced in Nechepurenko (2026) as a stand-alone diagnostic. We make four contributions: (i) a revised persistence component using the persistence ratio PR(t,w) on logit prices, well-defined on short rolling windows; (ii) a weighted Cobb-Douglas form SCI(ααα) with flow-based concentration HHI_flow; (iii) a time-varying specification SCI(t; w) for real-time monitoring; and (iv) Monte Carlo validation including an out-of-distribution stress test, coordinated multi-wallet manipulation, and a logistic-regression benchmark. The validation establishes discrimination among designed microstructure regimes, not external evidence of downstream coordination effects. We document two failure modes consistent with the index targeting coordination credibility rather than pure information content: a Type II error on informed-but-concentrated whale repricing, and a Type I error on coordinated multi-wallet manipulation.

Complexity vs Empirical Score

• Math Complexity: 5.5/10
• Empirical Rigor: 7.5/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper combines formalization of microstructural metrics using logit transformations and Cobb-Douglas weighting with rigorous validation via Monte Carlo simulations, AUC metrics, and out-of-distribution stress testing.

Research Flowchart

  flowchart TD
    A[<b>Research Goal:</b> Diagnostic for Prediction-Market Signal Credibility] --> B[<b>Inputs:</b> Order Flow & Logit Prices]
    B --> C[<b>Methodology:</b> Microstructure-Grounded SCI Framework]
    C --> D[<b>Computational Process:</b> Persistence Ratio, HHI Flow, & Time-Varying SCI]
    D --> E[<b>Validation:</b> Monte Carlo & Stress Testing]
    E --> F[<b>Findings:</b> Identification of Whale Repricing (Type II) & Multi-Wallet Manipulation (Type I) Errors]