arXiv · arXiv q-fin · 2026
We study cash-flow forecasting for derivatives used in liquidity management and clarify its relation to risk-neutral valuation and replication. While it is well known that expectations under different measures (e.g., $\mathbb{P}$ vs. $\mathbb{Q}$) can yield different undiscounted cash-flows, further inconsistencies arise when payment times are stochastic. We show that using discounting sensitivities (funding-curve he…
Christian P. Fries
arXiv · arXiv q-fin · 2026
Prediction markets increasingly list contracts settling on an asset price that holders can move by trading the underlying. We build a model showing that such contracts transfer wealth from prediction-market liquidity traders to manipulators and harm price discovery in the underlying, even as it becomes more liquid. After the launch of Polymarket's five-minute Bitcoin contract, settlement-time spot order flow spikes, …
David Dai, Ruizhe Jia, Shihao Yu
arXiv · arXiv q-fin · 2018
We solve the superhedging problem for European options in an illiquid extension of the Black-Scholes model, in which transactions have transient price impact and the costs and the strategies for hedging are affected by physical or cash settlement requirements at maturity. Our analysis is based on a convenient choice of reduced effective coordinates of magnitudes at liquidation for geometric dynamic programming. The p…
Dirk Becherer, Todor Bilarev
arXiv · arXiv q-fin · 2013
We depart from the usual methods for pricing contracts with the counterparty credit risk found in most of the existing literature. In effect, typically, these models do not account for either systemic effects or at-first-default contagion and postulate that the contract value at default equals either the risk-free value or the pre-default value. We propose instead a fairly general framework, which allows us to perfor…
Cyril Durand, Marek Rutkowski
arXiv · arXiv q-fin · 2025
Prediction markets have gained adoption as on-chain mechanisms for aggregating information, with platforms such as Polymarket demonstrating demand for stablecoin-denominated markets. However, denominating in non-interest-bearing stablecoins introduces inefficiencies: participants face opportunity costs relative to the fiat risk-free rate, and Bitcoin holders in particular lose exposure to BTC appreciation when conver…
Fedor Shabashev
arXiv · arXiv q-fin · 2025
The tokenization of real-world assets (RWAs) promises to transform financial markets by enabling fractional ownership, global accessibility, and programmable settlement of traditionally illiquid assets such as real estate, private credit, and government bonds. While technical progress has been rapid, with over \$25 billion in tokenized RWAs brought on-chain as of 2025, liquidity remains a critical bottleneck. This pa…
Rischan Mafrur
arXiv · arXiv q-fin · 2025
Autonomous Market Makers (AMMs) rely on arbitrage to facilitate passive price updates. Liquidity fragmentation poses a complex challenge across different blockchain networks. This paper proposes FluxLayer, a solution to mitigate fragmented liquidity and capture the maximum extractable value (MEV) in a cross-chain environment. FluxLayer is a three-layer framework that integrates a settlement layer, an intent layer, an…
Xin Lao, Shiping Chen, Qin Wang
arXiv · arXiv q-fin · 2020
We consider shared listings on two South African equity exchanges: the Johannesburg Stock Exchange (JSE) and the A2X Exchange. A2X is an alternative exchange that provides for both shared listings and new listings within the financial market ecosystem of South Africa. From a science perspective it provides the opportunity to compare markets trading similar shares, in a similar regulatory and economic environment, but…
Ivan Jericevich, Patrick Chang, Tim Gebbie
arXiv · arXiv q-fin · 2025
Decentralized prediction markets (DePMs) allow open participation in event-based wagering without fully relying on centralized intermediaries. We review the history of DePMs which date back to 2011 and includes hundreds of proposals. Perhaps surprising, modern DePMs like Polymarket deviate materially from earlier designs like Truthcoin and Augur v1. We use our review to present a modular workflow comprising eight sta…
Nahid Rahman, Joseph Al-Chami, Jeremy Clark
arXiv · arXiv q-fin · 2026
Current post-trade clearing systems rely almost exclusively on cash or cash-like collateral, leaving vast reserves of short-term liquidity embedded in trade credit outside formal settlement infrastructures. A key barrier to integrating this liquidity is the near-universal dependence of clearing services on novation, which imposes institutional overhead that restricts accessibility and limits the range of obligations …
Tomaž Fleischman, Ethan Buchman
arXiv · arXiv q-fin · 2026
Prediction markets are attracting growing attention as trading volumes rise and their practical relevance increases. To ensure efficient price discovery, liquidity provision becomes ever more important. Due to the binary settlement structure in prediction markets, optimal market making leads to an optimization problem that is fundamentally different from the ones studied in classical settings. In this paper, we devel…
Dominik Feil, Max Nendel
arXiv · arXiv q-fin · 2026
Prediction markets offer a natural testbed for trading agents: contracts have binary payoffs, prices can be interpreted as probabilities, and realized performance depends critically on market microstructure, fees, and settlement risk. We introduce PredictionMarketBench, a SWE-bench-style benchmark for evaluating algorithmic and LLM-based trading agents on prediction markets via deterministic, event-driven replay of h…
Avi Arora, Ritesh Malpani
arXiv · arXiv q-fin · 2023
Perpetual swaps are derivative contracts that allow traders to speculate on, or hedge, the price movements of cryptocurrencies. Unlike futures contracts, perpetual swaps have no settlement or expiration in the traditional sense. The funding rate acts as the mechanism that tethers the perpetual swap to its underlying with the help of arbitrageurs. Open interest, in the context of perpetual swaps and derivative contrac…
Ioannis Giagkiozis, Emilio Said
arXiv · arXiv q-fin · 2022
The study proposes a quote-driven predictive automated market maker (AMM) platform with on-chain custody and settlement functions, alongside off-chain predictive reinforcement learning capabilities to improve liquidity provision of real-world AMMs. The proposed AMM architecture is an augmentation to the Uniswap V3, a cryptocurrency AMM protocol, by utilizing a novel market equilibrium pricing for reduced divergence a…
Tristan Lim
arXiv · arXiv q-fin · 2018
A blockchain replaces central counterparties with time-consuming consensus protocols to record the transfer of ownership. This settlement latency slows cross-exchange trading, exposing arbitrageurs to price risk. Off-chain settlement, instead, exposes arbitrageurs to costly default risk. We show with Bitcoin network and order book data that cross-exchange price differences coincide with periods of high settlement lat…
Nikolaus Hautsch, Christoph Scheuch, Stefan Voigt
arXiv · arXiv q-fin · 2026
Autonomous AI agents are beginning to occupy a position between analytical tools and transacting counterparties. They can interpret goals, call external tools, negotiate with other agents, access data and computation, and in some settings initiate payments or blockchain transactions. This development creates a distinct problem for financial markets: if software agents can act economically, market participants need in…
Hui Gong
arXiv · arXiv q-fin · 2017
We introduce blockchains and distributed ledgers and describe their potential applications to money and banking. The analysis compares public and private ledgers and outlines the suitability of various types of ledgers for different purposes. Furthermore, a few historical prototypes of blockchains and distributed ledgers are presented, and results of their hard forking are illustrated. Next, some potential applicatio…
Alexander Lipton