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Price Biases in a Prediction Market: NFL Contracts on Tradesports

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  • Richard Borghesi
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    Abstract

    We examine deviations between the prices and values of binary options listed on Tradesports.com, an online prediction market. Our analysis shows that NFL sides contracts are overpriced on average, indicating that this market may be characterized by a shortage of sellers. We also find that overpricing is more pronounced immediately after information shocks occur, especially when the news is negative. Additionally, while prior research suggests that differences between asset prices and values should be symmetric around the market-price-midpoint of $50, we find that this divergence is instead larger for low-priced contracts. Finally, we demonstrate that a simple rule designed to exploit the identified biases enables a highly profitable trading strategy.

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    File URL: http://www.ingentaconnect.com/content/ubpl/jpm/2007/00000001/00000003/art00005
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    Bibliographic Info

    Article provided by University of Buckingham Press in its journal Journal of Prediction Markets.

    Volume (Year): 1 (2007)
    Issue (Month): 3 (December)
    Pages: 233-253

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    Handle: RePEc:buc:jpredm:v:1:y:2007:i:3:p:233-253

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    Web page: http://www.ubpl.co.uk/

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    Web: http://www.predictionmarketjournal.com/index_files/Page418.htm

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    Cited by:
    1. Easton, Stephen & Uylangco, Katherine, 2010. "Forecasting outcomes in tennis matches using within-match betting markets," International Journal of Forecasting, Elsevier, vol. 26(3), pages 564-575, July.

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