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Price Biases in a Prediction Market: NFL Contracts on Tradesports

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  • Richard Borghesi

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.

Suggested Citation

  • Richard Borghesi, 2007. "Price Biases in a Prediction Market: NFL Contracts on Tradesports," Journal of Prediction Markets, University of Buckingham Press, vol. 1(3), pages 233-253, December.
  • Handle: RePEc:buc:jpredm:v:1:y:2007:i:3:p:233-253
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    1. repec:spr:jecfin:v:41:y:2017:i:4:d:10.1007_s12197-016-9375-5 is not listed on IDEAS
    2. Richard Borghesi, 2014. "The impact of the disposition effect on asset prices: insight from the NBA," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 698-711, October.
    3. David Paton & Donald S. Siegel & Leighton Vaughan Williams, 2009. "The Growth of Gambling and Prediction Markets: Economic and Financial Implications," Economica, London School of Economics and Political Science, vol. 76(302), pages 219-224, April.
    4. 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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