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Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?

  • Williams, Leighton Vaughan
  • Paton, David

In this paper, the authors employ a large new data set to examine explanations of the tendency for favorites to be under-bet and longshots over-bet in recent British racetrack betting markets. They demonstrate that both demand-and-supply side factors can explain this favorite-longshot bias and propose new empirical tests to identify the influence of insider trading on the bias. The results suggest that the adverse selection problem faced by bookmakers, in the context of bettors who may possess superior information, is capable of explaining at least some of the observed bias. Copyright 1997 by Royal Economic Society.

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

Volume (Year): 107 (1997)
Issue (Month): 440 (January)
Pages: 150-58

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Handle: RePEc:ecj:econjl:v:107:y:1997:i:440:p:150-58
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  1. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-85, September.
  2. Shin, Hyun Song, 1992. "Prices of State Contingent Claims with Insider Traders, and the Favourite-Longshot Bias," Economic Journal, Royal Economic Society, vol. 102(411), pages 426-35, March.
  3. Shin, Hyun Song, 1993. "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal, Royal Economic Society, vol. 103(420), pages 1141-53, September.
  4. Dowie, Jack A, 1976. "On the Efficiency and Equity of Betting Markets," Economica, London School of Economics and Political Science, vol. 43(17), pages 139-50, May.
  5. Tuckwell, R H, 1983. "The Thoroughbred Gambling Market: Efficiency, Equity and Related Issues," Australian Economic Papers, Wiley Blackwell, vol. 22(4), pages 106-18, June.
  6. Jullien, Bruno & Salanie, Bernard, 1994. "Measuring the Incidence of Insider Trading: A Comment on Shin," Economic Journal, Royal Economic Society, vol. 104(427), pages 1418-19, November.
  7. Ron Bird & Michael McCrae, 1987. "Tests of the Efficiency of Racetrack Betting Using Bookmaker Odds," Management Science, INFORMS, vol. 33(12), pages 1552-1562, December.
  8. Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-74, Spring.
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