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

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  • M. SUNG
  • J. E. V. JOHNSON

Abstract

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.

Suggested Citation

  • M. Sung & J. E. V. Johnson, 2010. "Revealing Weak-Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies," Economica, London School of Economics and Political Science, vol. 77(305), pages 128-147, January.
  • Handle: RePEc:bla:econom:v:77:y:2010:i:305:p:128-147
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    References listed on IDEAS

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    Cited by:

    1. Egon Franck & Erwin Verbeek & Stephan NĂ¼esch, 2013. "Inter-market Arbitrage in Betting," Economica, London School of Economics and Political Science, vol. 80(318), pages 300-325, April.
    2. Lessmann, Stefan & Sung, Ming-Chien & Johnson, Johnnie E.V. & Ma, Tiejun, 2012. "A new methodology for generating and combining statistical forecasting models to enhance competitive event prediction," European Journal of Operational Research, Elsevier, vol. 218(1), pages 163-174.
    3. Miller, Thomas W. & Rapach, David E., 2013. "An intra-week efficiency analysis of bookie-quoted NFL betting lines in NYC," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 10-23.

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