Insider trading and bias in a market for state-contingent claims

Schnytzer, Adi; Shilony, Yuval

doi:10.1017/cbo9780511493614.014

Cited by 9 publications

(11 citation statements)

References 9 publications

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“…Therefore, the model is able to explain the favourite‐longshot bias as an optimal pricing response of bookmakers to information uncertainty and the adverse selection problem. A similar argument has been made by Shin (1991, 1992, 1993), Ottaviani and Sørensen (2005), and Schnytzer and Shilony (2005) who examined the racetrack betting market. Moreover, Ottaviani and Sørensen (2005) argued that such information‐based theories can also provide an explanation for the higher level of bias observed in bookmaking markets relative to pari‐mutuel markets.…”

supporting

confidence: 66%

Optimal Price Setting in Fixed‐odds Betting Markets Under Information Uncertainty

Makropoulou

Markellos

2011

Scottish J Political Eco

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This paper develops a model of optimal pricing under information uncertainty for fixed‐odds betting markets. The model suggests that bookmakers require a premium for quoting the odds several days before an event. This premium reflects the uncertainty of public information that can be exploited by expert bettors. The model predicts that when bookmakers set optimal prices, expected returns to bettors increase as a monotonic function of winning probabilities. In this manner, an information‐based explanation is given for the celebrated favourite‐longshot bias in fixed‐odds. Using an extensive data‐set of football odds from two major European bookmakers, we estimate the probability of informed betting.

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supporting

confidence: 66%

Optimal Price Setting in Fixed‐odds Betting Markets Under Information Uncertainty

Makropoulou

Markellos

2011

Scottish J Political Eco

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“…They demonstrate that bettors manifest the FLB and bookmakers take this into account when setting their odds. Schnytzer and Shilony (2005) develop a model that avoids the restrictive assumptions of Shin's (1991, 1992, 1993) models and they use this to demonstrate that the FLB can arise through bookmakers' mispricing at opening odds (which is not fully removed because bookmakers employ a limited range of discrete odds and the market operates over a short time span). However, they confirm Shin's conclusion that the FLB increases as the proportion of insiders increases.…”

Section: Factors Influencing Horserace Betting Market Efficiencymentioning

confidence: 99%

“…Market ecology can influence the degree to which prices are distorted. In particular, market makers play a central role in bookmaker markets and both Shin (1991, 1992, 1993) and Schnytzer and Shilony (2003, 2005) suggest that there are factors (discussed later) which can lead bookmakers to distort prices to a greater extent than would be the case in pari‐mutuel markets. This view is confirmed by Bruce and Johnson (2005), yet the majority of papers exploring weak‐form efficiency in betting markets have examined pari‐mutuel markets.…”

Section: Introductionmentioning

confidence: 99%

Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies

Sung

Johnson

2009

Economica

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This paper examines the degree to which current prices discount historical prices in a market for state contingent claims. Conditional logit analysis is employed to predict winning probabilities, based on market prices in a betting market. These are used, together with various wagering strategies to yield substantial abnormal returns. Consequently, in contrast to the existing literature, the results suggest that the market is not weak form efficient. The disparity with previous efficiency studies highlights the importance of considering market ecology and of adopting an appropriate modelling procedure and investment strategy to fully exploit information contained in market prices. Copyright (c) The London School of Economics and Political Science 2008.

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“…These bettors are typically labeled as insiders (see, for example, Crafts [1985] and Paton, Vaughan Williams, and Fraser [1999]). Schnytzer and Shilony (1995, 2005 develop models in which the bookmaker responds to betting by insiders by adjusting the odds in the betting market.…”

Section: Insider Informationmentioning

confidence: 99%

“…The setting of odds on gambling events has been the subject of much academic attention over the last 30 years: See the reviews by Sauer (1998), Thaler and Ziemba (1988), Vaughan , and Coleman (2004). In particular, the impact of the use of insider information by gamblers has been examined in a large number of theoretical and empirical studies: See the work of Dowie (1976); Crafts (1985); Henery (1985); Shin (1991Shin ( , 1992Shin ( , 1993; Schnytzer and Shilony (1995, 2005; Vaughan Williams and Paton (1997); Paton, Vaughan Williams, and Fraser (1999); and Schnytzer and Snir (2008). Additionally, the regulation of the use of information in gambling and prediction markets has become a subject of great interest: See the work of Paton, Siegel, and Vaughan Williams (2009).…”

Section: Introductionmentioning

confidence: 99%

Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior

Peirson

Smith

2010

Southern Economic Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may ABSTRACT:We present a new model analyzing the effect of uncertainty faced by bookmakers. It is shown that bettors with inside information or expert analysis decrease the odds set by profit maximizing bookmakers. Data on previously unraced two year old horses and those that have raced previously are used to examine the impact of the greater possibility of insider information on odds bias in relation to unraced horses. The price of a bet on unraced two year olds is found to be on average 15% higher and the effect varies as the probability of winning increases. The latter effect suggests a possible contribution to the favorite-longshot bias and the former shows the importance of insider information in the setting of market prices. The regulation of the use of insider information is discussed in the light of the similar impact of insider information and expert analysis on bookmaker odds.

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Insider trading and bias in a market for state-contingent claims

Cited by 9 publications

References 9 publications

Optimal Price Setting in Fixed‐odds Betting Markets Under Information Uncertainty

Optimal Price Setting in Fixed‐odds Betting Markets Under Information Uncertainty

Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies

Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behavior

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