basis risk

The residual mismatch between an exposure being hedged and the instrument used to hedge it — arising from differences in timing, magnitude, probability distribution, or risk factor sensitivity. In the context of prediction market event contracts, basis risk is significant because binary contracts are designed around a specific event definition rather than the full cash-flow profile of a corporate exposure, making them a rough hedge at best.

Cluster: Liquidity & Trading

Related Concepts

• hedging — Taking offsetting positions to reduce exposure to adverse price movements or uncertain outcomes.
• event contracts — Standardized binary contracts on specific real-world events, the core trading unit of prediction markets.
• market structure — The organization and stratification of prediction market platforms into distinct layers — rails (settlement/execution), wrappers (distribution/user access), and product archetypes — and the competitive dynamics between them.

Articles about basis risk

• A Hedge Is Not a Product by Lauris