Information Efficiency in Financial and Betting Markets

Cover......Page 1
Half-title......Page 3
Title......Page 5
Copyright......Page 6
Dedication......Page 7
Contents......Page 9
Figures......Page 11
Tables......Page 13
Contributors......Page 15
Introduction......Page 21
Part I The concept of information efficiency......Page 23
1.2.1 The efficient markets hypothesis: reviewing the development of an idea......Page 25
1.2.2 Random walks, fair games and martingales......Page 27
1.2.3 Weak, semi-strong and strong form efficiency: classifications of information efficiency......Page 29
1.2.4 The efficient markets hypothesis: a summary......Page 30
1.3 Empirical tests of weak form information efficiency in financial markets......Page 31
1.3.1 Testing for price change dependence using serial correlation techniques......Page 32
1.3.2 Variance ratio tests......Page 33
1.3.3 Cointegration tests of the efficient markets hypothesis......Page 36
1.3.4 The application of rescaled range analysis and chaos theory to efficient markets analysis......Page 38
1.3.5 Price dependence, abnormal returns and information efficiency......Page 41
1.3.6 Tests of return predictability......Page 46
1.3.7 Empirical tests of weak form information efficiency in financial markets: a summary......Page 48
1.4 Empirical tests of semi-strong form information efficiency in financial markets......Page 50
1.4.1 The impact of new public information on security prices......Page 51
1.4.2 Reconciling market 'anomalies' with information efficiency......Page 54
The 'small firm' effect......Page 55
The 'January' effect......Page 56
Day-of-the-week effects......Page 59
The 'winner's curse' and 'loser's blessing' (overreaction)......Page 62
The 'closed-end fund' puzzle......Page 65
1.4.3 Summary of empirical tests of semi-strong form information efficiency in financial markets......Page 67
1.5 Empirical tests of strong form information efficiency in financial markets......Page 68
1.5.1 The effect of insider information on expected returns......Page 69
1.5.2 The performance of professional forecasting services......Page 71
1.5.3 A summary of empirical tests of strong form information efficiency in financial markets......Page 79
Notes......Page 81
References......Page 83
2.1 Introduction......Page 104
2.2 Measuring the expected returns to bets at differing odds......Page 105
2.3 Risk, return and favourite-longshot bias......Page 113
2.4 Explaining the favourite-longshot bias in terms of utility maximisation......Page 123
2.5 The implications of systematic underestimation by bettors of their losses for understanding favourite-longshot bias......Page 126
2.6 The favourite-longshot bias as a supply-side phenomenon......Page 128
2.7 Technical systems of betting......Page 129
2.8 Weak form information efficiency in betting markets: summary and conclusions......Page 134
Notes......Page 135
References......Page 137
3.1 Introduction......Page 143
3.2.1 Efficiency and exotic betting markets......Page 144
3.2.2 Employing expected returns to bets at 'Tote' odds and at starting prices to test for semi-strong form efficiency......Page 146
3.3 Testing for the existence of a 'gambler's fallacy'......Page 149
3.4 Fundamental strategies and tests for semi-strong form efficiency in betting markets......Page 151
3.5.1 Efficiency and the information content of publicly available racetrack forecasts......Page 156
3.5.2 Relationship between expert opinion and betting odds......Page 157
3.6.1 Available and predicted odds......Page 158
3.6.2 Measuring the incidence of insider trading in a betting market......Page 163
3.7 Semi-strong and strong form information efficiency in betting markets: summary and conclusions......Page 167
Notes......Page 170
References......Page 171
Part II Selected readings......Page 177
4.2 Background......Page 179
4.3 A model of Quarbs......Page 181
4.4 Data......Page 183
4.5 Results......Page 185
4.6 Discussion......Page 188
4.7 Conclusion......Page 190
References......Page 191
5.1 Introduction......Page 192
5.3 The impact of offered odds of the presence of favourites......Page 193
5.4 Explanations of the impact of favourites on the biases in odds......Page 195
5.5 Conclusions......Page 196
References......Page 197
6.1.1 Semi-strong form betting market efficiency......Page 199
6.2.1 Data and variables......Page 201
6.2.2 Method......Page 202
6.3.1 Stage 1......Page 205
6.3.2 Stage 2......Page 207
6.4 Interpretation and discussion......Page 208
References......Page 211
7.1 Econometric studies......Page 213
7.2 The opinion polls......Page 216
7.3 The experts......Page 218
7.4 Betting markets......Page 219
7.5 Summary and conclusion......Page 225
A.3 Panel of experts......Page 228
A.4 Betting markets......Page 229
References......Page 230
8.1 Motivation......Page 235
8.2 The advantages of studying tennis betting......Page 238
8.3 Data and results......Page 239
8.4 Reflections......Page 244
Notes......Page 248
References......Page 249
9 Biases and insider trading in exotic bets on thoroughbreds......Page 251
9.1 Insider trading in thoroughbred wagering markets......Page 252
9.2.1 The market......Page 253
9.2.2 Data......Page 256
9.3 Results......Page 257
9.3.1 Analysis of trifecta bets......Page 258
9.3.2 Analysis of quinella bets......Page 259
9.3.3 Extent of insider trading......Page 261
9.4 Discussion and implications......Page 262
References......Page 265
10.1 Introduction......Page 267
10.2.1 Preliminaries......Page 268
10.2.2 Steady-state behaviour......Page 270
10.2.3 The effect of track take......Page 271
10.3 The steady-state condition for the m-horse-race......Page 272
10.4 A three-horse-race......Page 273
Appendix......Page 276
References......Page 280
11.1 Introduction......Page 282
11.2 The experimental gambling market......Page 283
11.3 Statistical models of gaming demand......Page 287
11.4 Estimation results......Page 288
11.5 Implications for decision making......Page 292
11.6 Conclusions......Page 294
References......Page 295
12.1 Introduction......Page 297
12.2 The Harville method......Page 298
12.3 Testing the model......Page 300
12.4 Betting systems......Page 301
12.5 Conclusions......Page 304
References......Page 305
13.1 Introduction......Page 307
13.2 The Melbourne bookmaking market......Page 309
13.3.1 Information......Page 312
13.3.2 Stage 1: monopoly......Page 313
13.4 The optimally planned favourite-longshot bias in OP......Page 315
13.5 Pricing mistakes and the observed bias......Page 316
13.5.1 Horse j and k are both overpriced......Page 317
13.5.3 Horse j and k are both underpriced......Page 318
13.6 Stage 2:competition and starting prices......Page 319
13.7 Empirical tests......Page 323
13.7.1 Opening price tests......Page 324
13.7.2 Starting price tests......Page 325
Appendix......Page 326
Notes......Page 331
References......Page 332
14.1 Introduction to the 'lot to' game......Page 333
14.2 Lotto returns and number selection......Page 334
14.2.1 Lotto fever and lotto apathy......Page 336
14.2.2 Drawings within the cycle......Page 337
14.3.1 Occurrence......Page 342
14.3.2 Fair bets in the lottery......Page 343
14.4 The 'Trump Ticket'......Page 347
14.5 Conclusions......Page 348
References......Page 349
15.1 Motivation......Page 350
15.2 The model......Page 352
15.3 Results......Page 354
Notes......Page 356
References......Page 357
16.1 Background......Page 359
16.2 Methodology and modelling......Page 360
16.3 Results......Page 361
16.4 Discussion......Page 363
Note......Page 364
References......Page 365
17.2 The bootstrap methods, statistical inference......Page 366
17.3 Tote returns in British horse racing......Page 368
17.4 Empirical evidence on the favourite-longshot bias and some observations on its theoretical underpinnings......Page 372
17.5 Testing efficiency in football fixed-odds betting markets......Page 377
Notes......Page 382
References......Page 383
18.1 Introduction......Page 386
18.2 Design of prediction markets......Page 387
18.3 Applications and evidence......Page 388
18.4.1 Information aggregation......Page 391
18.4.2 Truthful revelation......Page 393
18.4.3 Information discovery and sharing......Page 395
18.5 Performance of prediction markets......Page 396
18.6 Using prediction markets in decision making......Page 399
18.7 Looking forward......Page 403
Notes......Page 404
References......Page 405
Index......Page 407