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Do market participants misprice lottery-type assets? Evidence from the European soccer betting market

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  • Franke, Maximilian

Abstract

This paper addresses findings from previous asset pricing research that reveal lottery-like stocks are mispriced. This conclusion, however, relies on asset pricing models which might suffer from the joint hypothesis problem: That is, abnormal returns can reflect market inefficiencies, a bad asset pricing model or both. I contribute to the discussion by examining lottery-type assets on the European betting market. Compared to stock markets, betting markets offer the advantage that no asset pricing model is necessary to test market efficiency because outcomes are observable at a terminal point. I use a unique data set of soccer odds covering both a betting exchange and the bookmaker market. The findings reveal a favorite-longshot bias in both market structures confirming the findings from previous literature that lottery-type assets are mispriced. An expected utility model and a prospect theory model confirm that the favorite-longshot bias on the betting exchange is due to misperception of probabilities rather than risk-love. Although bookmakers also bias odds there is evidence that bookmakers are rational in protecting themselves from adverse selection and/or in increasing their turnover. This conclusion is supported by further analysis on the tennis betting market.

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  • Franke, Maximilian, 2020. "Do market participants misprice lottery-type assets? Evidence from the European soccer betting market," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 1-18.
    • Handle: RePEc:eee:quaeco:v:75:y:2020:i:c:p:1-18
    DOI: 10.1016/j.qref.2019.05.016
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    Cited by:

    1. David Winkelmann & Christian Deutscher & Marius Ötting, 2021. "Bookmakers’ mispricing of the disappeared home advantage in the German Bundesliga after the COVID-19 break," Applied Economics, Taylor & Francis Journals, vol. 53(26), pages 3054-3064, June.
    2. Christian Deutscher & David Winkelmann & Marius Otting, 2020. "Bookmakers' mispricing of the disappeared home advantage in the German Bundesliga after the COVID-19 break," Papers 2008.05417, arXiv.org, revised Aug 2020.
    3. Pascal Flurin Meier & Raphael Flepp & Egon Franck, 2021. "Are sports betting markets semistrong efficient? Evidence from the COVID-19 pandemic," Working Papers 387, University of Zurich, Department of Business Administration (IBW).
    4. David Winkelmann & Marius Ötting & Christian Deutscher & Tomasz Makarewicz, 2024. "Are Betting Markets Inefficient? Evidence From Simulations and Real Data," Journal of Sports Economics, , vol. 25(1), pages 54-97, January.
    5. Andrea Schertler & Jarmo Beurden, 2023. "How relative competitive strength moderates stock price responses after European soccer tournaments," Journal of Business Economics, Springer, vol. 93(8), pages 1385-1414, October.
    6. Ruud H. Koning & Renske Zijm, 2023. "Betting market efficiency and prediction in binary choice models," Annals of Operations Research, Springer, vol. 325(1), pages 135-148, June.

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    More about this item

    Keywords

    Lottery-type assets; Favorite-longshot bias; Betting exchange; Bookmaker market; Misperception; Adverse selection;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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