“more liquidity doesn't mean better predictions, just more noise”
Analysis of 149 CPI prediction markets on Kalshi from 2021 to 2026 finds that trading volume explains less than 1% of variance in forecast accuracy, challenging the assumption that more liquidity improves market quality. Introduces Minimum Viable Liquidity (Cost of Expertise divided by Price Gap) as a framework for determining the threshold of liquidity needed to attract informed traders. Argues platforms should prioritize breadth over depth, running many thin markets rather than concentrating volume in few contracts.
Some technical background helpful
Platforms mentioned: Kalshi