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An Examination of Prediction Market Efficiency: NBA Contracts on Tradesports

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  • Richard Borghesi
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    Abstract

    In this paper I examine the absolute and relative price efficiency of NBA options listed on Tradesports. com. I find that contracts within specific price bands are misvalued, but also demonstrate that this market is more efficient than is the market for NFL options. Specifically, I show that contracts priced around $25 win (expire at $100) at a rate less than expected, while those priced around $75 win at a rate greater than expected. The magnitudes of these deviations between prices and fundamental values are less than those in the NFL market. Also, while prior theoretical work predicts that low-priced contracts should be overpriced, I instead find that NBA contracts priced near $2.50 win more frequently than expected.

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    Bibliographic Info

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

    Volume (Year): 3 (2009)
    Issue (Month): 2 (August)
    Pages: 65-77

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    Handle: RePEc:buc:jpredm:v:3:y:2009:i:2:p:65-77

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