Fixed Odds Bookmaking with Stochastic Betting Demands

Abstract

This paper studies fixed odds bookmaking in the market for bets in a British horse race. The bookmaker faces the risk of unbalanced liability exposures. Even random shocks in the noisy betting demands are costly to the bookmaker since his book could become less balanced. In our model, the bookmaker sets appropriate odds to influence the betting flow to mitigate the risk. The stylised fact of the favourite‐longshot bias only arises from the model under specific assumptions. Our model offers insights into the complexity of managing a series of state contingent exposures such as options.

Bookmakers' mispricing of the disappeared home advantage in the German Bundesliga after the COVID-19 break

“…The again so-called home bias refers to increased payouts (equivalent to higher odds) for the home team compared to the fair odds. Such biased odds can arise from the bookmakers inability to predict game outcomes, their knowledge that fans are somewhat unable to assess teams' strength (Na et al, 2019) or their goal to have a so-called balanced book, which is given if wagers on both outcomes (home and away win) level out such that the bookmakers secure a profit independent of the game outcome (Hodges et al, 2013). Since bettors rather bet on underdogs than favourites, bookmakers offer favourable odds on home wins (Franke, 2020).…”