Both axes use asinh compression — tick labels show real values.
▸Glossary(14)
Orientation
This surface answers that question for 87 contracts across 5 asset classes. The vertical axis measures the structural cost embedded in derivatives — variance risk premium, dealer balance sheet, replication friction — that prediction markets simply don’t charge. The horizontal axis measures execution cost: how much it costs to trade the prediction market at $3M institutional scale. Where the embedded tax exceeds the switching friction, capital migrates.
▸Reading the surface
The paper asks: when should an institution use a prediction market instead of a derivative to hedge a binary risk? Every time an institution hedges with derivatives, three costs get baked into the price that a prediction market simply doesn\u2019t charge. These structural costs (variance risk premium, dealer balance sheet, replication friction) are absent from event contracts. But prediction markets have their own cost: execution friction at institutional scale.
Vertical axis: the Vega Wedge (W = VRP + B + F) — structural cost that derivatives charge and PM avoids. Horizontal axis: execution cost to trade that contract in a prediction market at $3M. The diagonal surface is breakeven. Above it, PM is cheaper. Below it, derivatives win.
The VRP Gradient — structural cost PM avoids, by category
This contract exists outside the topology — negative VRP means the structural precondition for PM advantage is absent. Derivatives are inherently cheaper regardless of PM liquidity.