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Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims

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  • Shin, Hyun Song

Abstract

Even in competitive financial markets, the presence of insider traders leads to a divergence between the selling and buying price, as intermediaries attempt to recoup their losses to the insiders by extracting a margin from other traders. The extent of this divergence is an indication of the severity of the market distortion due to insider trading. Conversely, the incidence of insider trading may be inferred from observed spreads given an appropriate model of trading. In this paper, the market for bets in a horse race in which bookmakers set prices serves as the vehicle for such an investigation. By solving for the equilibrium prices in a game in which bookmakers compete in prices, the market spread is obtained as a function of the incidence of insider trading and other parameters. this incidence is then estimated from U.K. data. Copyright 1993 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 103 (1993)
Issue (Month): 420 (September)
Pages: 1141-53

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Handle: RePEc:ecj:econjl:v:103:y:1993:i:420:p:1141-53

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Cited by:
  1. Leighton Vaughan Williams & David Paton, 1998. "Why are some favourite-longshot biases positive and others negative?," Applied Economics, Taylor & Francis Journals, vol. 30(11), pages 1505-1510.
  2. Bruce, Alistair C. & Johnson, Johnnie E.V., 2005. "Market ecology and decision behaviour in state-contingent claims markets," Journal of Economic Behavior & Organization, Elsevier, vol. 56(2), pages 199-217, February.
  3. Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2009. "The Impact of Insider Trading on Forecasting in a Bookmakers' Horse Betting Market," Working Papers 2009-11, Department of Economics, Bar-Ilan University.
  4. Les Coleman, 2007. "Just How Serious is Insider Trading? An Evaluation using Thoroughbred Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 31-55, February.
  5. Charles Moul & Joseph Keller, 2014. "Time to Unbridle U.S. Thoroughbred Racetracks? Lessons from Australian Bookies," Review of Industrial Organization, Springer, vol. 44(3), pages 211-239, May.
  6. McAlvanah, Patrick & Moul, Charles C., 2013. "The house doesn’t always win: Evidence of anchoring among Australian bookies," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 87-99.
  7. Smith, Michael A. & Vaughan Williams, Leighton, 2010. "Forecasting horse race outcomes: New evidence on odds bias in UK betting markets," International Journal of Forecasting, Elsevier, vol. 26(3), pages 543-550, July.
  8. John Peirson, 2008. "Expert Analysis and Insider Information in Horse Race Betting: Regulating Informed Market Behaviour," Studies in Economics 0819, Department of Economics, University of Kent.
  9. Nikolaos Vlastakis & George Dotsis & Raphael N. Markellos, 2009. "How efficient is the European football betting market? Evidence from arbitrage and trading strategies," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(5), pages 426-444.
  10. Smith, Michael A. & Paton, David & Williams, Leighton Vaughan, 2009. "Do bookmakers possess superior skills to bettors in predicting outcomes?," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 539-549, August.
  11. Martin Kukuk & Stefan Winter, 2008. "An Alternative Explanation of the Favorite-Longshot Bias," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 2(2), pages 79-96, September.
  12. Bruce, A.C. & Johnson, J.E.V. & Peirson, J., 2012. "Recreational versus professional bettors: Performance differences and efficiency implications," Economics Letters, Elsevier, vol. 114(2), pages 172-174.
  13. Williams, Leighton Vaughan & Paton, David, 1997. "Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?," Economic Journal, Royal Economic Society, vol. 107(440), pages 150-58, January.
  14. Stephen Morris, 1997. "Risk, uncertainty and hidden information," Theory and Decision, Springer, vol. 42(3), pages 235-269, May.
  15. Michael A. Smith & David Paton & Leighton Vaughan-Williams, 2004. "Costs, biases and betting markets: new evidence," Working Papers 2004/5, Nottingham Trent University, Nottingham Business School, Economics Division.
  16. Stefan Winter & Martin Kukuk, 2008. "Do horses like vodka and sponging? - On market manipulation and the favourite-longshot bias," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 75-87.
  17. Jullien, Bruno & Salanié, Bernard, 2005. "Empirical Evidence on the Preferences of Racetrack Bettors," IDEI Working Papers 178, Institut d'Économie Industrielle (IDEI), Toulouse.
  18. Paton, David & Vaughan Williams, Leighton & Fraser, Stuart, 1999. "Regulating Insider Trading in Betting Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 51(3), pages 237-41, July.
  19. Masahiro Ashiya, 2013. "Lock! Risk-Free Arbitrage in the Japanese Racetrack Betting Market," Discussion Papers 1301, Graduate School of Economics, Kobe University.

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