Basket Construction Methodology

Overview

This methodology describes how to systematically construct, maintain, and rebalance prediction market baskets. Each basket represents exposure to a set of risk factors, constructed from contracts on Polymarket and Kalshi.

Part 1: Risk Factor Taxonomy

Risk factors are the atomic building blocks. Every contract maps to exactly one risk factor.

Energy (12 risk factors)

ID	Risk Factor	Description
E1	OPEC Production Policy	OPEC+ production decisions, quotas, compliance
E2	US Oil Policy	Drilling permits, SPR releases, export policy
E3	Oil Sanctions	Iran, Russia, Venezuela export restrictions
E4	Oil Infrastructure	Pipelines, refineries, tanker routes, storage
E5	European Gas Supply	LNG imports, Russian pipeline dependency, storage
E6	Asian Gas Demand	LNG contracts, demand growth, competition
E7	US Gas Policy	LNG export terminals, drilling, pipeline approvals
E8	Nuclear Policy	Restarts, new builds, shutdowns, SMR approvals
E9	Renewable Mandates	Solar/wind targets, subsidies, permitting
E10	EV Policy	ICE bans, EV subsidies, charging infrastructure
E11	Carbon Pricing	Carbon taxes, cap-and-trade, border adjustments
E12	Grid Reliability	Blackouts, capacity shortfalls, transmission

Commodities & Supply Chain (10 risk factors)

ID	Risk Factor	Description
C1	Grain Export Policy	Export bans, quotas, tariffs on wheat/corn/soy
C2	Agricultural Weather	El Niño, La Niña, drought, flooding
C3	Fertilizer Supply	Potash, nitrogen export restrictions, prices
C4	Base Metals Mining	Copper, aluminum, zinc strikes, disruptions
C5	Steel/Iron Trade	Tariffs, dumping, capacity cuts
C6	Rare Earth Policy	China export controls, non-China supply
C7	Lithium Supply	Chile, Australia policy, DRC cobalt
C8	Semiconductor Supply	Fab capacity, export controls, shortages
C9	Shipping Chokepoints	Suez, Panama, Hormuz, Malacca passage
C10	Port & Freight	Strikes, congestion, container availability

Political & Regulatory (14 risk factors)

ID	Risk Factor	Description
P1	US Government Funding	Shutdowns, continuing resolutions
P2	US Debt Ceiling	Breach, suspension, default risk
P3	US Electoral Process	Contested elections, certification disputes
P4	US Presidential Health	Incapacitation, succession
P5	US Regulatory Shift	Major agency policy changes
P6	EU Treaty Stability	Treaty changes, veto crises, reform
P7	EU Membership	Exit movements, Article 50, referendums
P8	EU Regulatory Shift	Digital, climate, competition enforcement
P9	China Leadership	Transitions, purges, succession
P10	China Tech Regulation	Platform crackdowns, data rules
P11	China Capital Controls	Outflow restrictions, FX policy
P12	China Foreign Business	Restrictions, nationalizations, exits
P13	EM Government Stability	Coups, impeachments, constitutional crises
P14	EM Policy Shift	Nationalizations, populist reversals

Part 2: Contract Selection

2.1 Initial Universe

Pull all active contracts from Polymarket and Kalshi.

2.2 Filtering Criteria

Filter	Threshold	Rationale
Minimum volume	>$50,000	Ensures executable liquidity
Minimum open interest	>$10,000	Active positions exist
Bid-ask spread	<10%	Not too illiquid
Time to expiration	30 - 365 days	Not stale, not too speculative
Resolution criteria	Binary, verifiable	No ambiguous outcomes
Platform status	Active	Tradeable

2.3 Relevance Scoring

Each contract is scored against each risk factor:

• 0 - Not related
• 1 - Tangentially related
• 2 - Directly related
• 3 - Core expression of this risk factor

Only contracts with score ≥ 2 are eligible for that risk factor.

Part 3: Side Assignment

Rule:

IF yes_means_disruption = TRUE
   THEN basket_holds = NO
ELSE
   basket_holds = YES

Classification Guide

YES Outcome Contains	yes_means_disruption
"invades," "attacks," "strikes"	TRUE
"cuts," "bans," "restricts," "blocks"	TRUE
"shuts down," "defaults," "collapses"	TRUE
"disrupted," "closes," "fails"	TRUE
"recession," "crisis," "outbreak"	TRUE
"peace," "deal," "agreement," "ceasefire"	FALSE
"avoids," "prevents," "survives"	FALSE
"grows," "expands," "stabilizes"	FALSE

Part 4: Basket Price Calculation

Formula:

Basket_Price = Σ (side_price_i × weight_i)

Where:

• If basket holds NO: side_price = 1 - yes_price
• If basket holds YES: side_price = yes_price

Interpretation

Basket Price	Meaning
0.80	Market implies 80% probability of stability
0.50	Market is neutral
0.20	Market implies 80% probability of disruption

End of Methodology Document