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The impact of insider trading on forecasting in a bookmakers' horse betting market

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  • Schnytzer, Adi
  • Lamers, Martien
  • Makropoulou, Vasiliki

Abstract

This paper uses a new variable, which is based on estimates of insider trading, to forecast the outcomes of horse races. We base our analysis on the work of Schnytzer, Lamers, and Makropoulou (2008), who showed that insider trading in the 1997-1998 Australian racetrack betting market represented between 20% and 30% of all trading in this market. They showed that the presence of insiders leads opening prices to deviate from the true winning probabilities. Under these circumstances, forecasts of race outcomes should take into account an estimate of the extent of insider trading for each horse. We show that the added value of this new variable for profitable betting is sufficient to reduce the losses when only prices are taken into account. Since the only variables taken into account by either Schnytzer et al. (2008) or this paper are price data, this is tantamount to a demonstration that the market is, in practice, weak-form efficient.

Suggested Citation

  • Schnytzer, Adi & Lamers, Martien & Makropoulou, Vasiliki, 2010. "The impact of insider trading on forecasting in a bookmakers' horse betting market," International Journal of Forecasting, Elsevier, vol. 26(3), pages 537-542, July.
    • Handle: RePEc:eee:intfor:v:26:y::i:3:p:537-542
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    References listed on IDEAS

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    1. Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2009. "Measuring the Extent of Inside Trading in Horse Betting Markets," Working Papers 2009-10, Bar-Ilan University, Department of Economics.
    2. Schnytzer, Adi & Shilony, Yuval, 1995. "Inside Information in a Betting Market," Economic Journal, Royal Economic Society, vol. 105(431), pages 963-971, July.
    3. Adi Schnytzer & Avichai Snir, 2008. "Herding in Imperfect Betting Markets with Inside Traders," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 2(2), pages 1-15, September.
    4. Hyun Song Shin, 2008. "Prices Of State Contingent Claims With Insider Traders, And The Favourite-Longshot Bias," World Scientific Book Chapters, in: Donald B Hausch & Victor SY Lo & William T Ziemba (ed.), Efficiency Of Racetrack Betting Markets, chapter 34, pages 343-352, World Scientific Publishing Co. Pte. Ltd..
    5. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
    6. 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 1141-1153, September.
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    Cited by:

    1. Sung, Ming-Chien & McDonald, David C.J. & Johnson, Johnnie E.V., 2016. "Probabilistic forecasting with discrete choice models: Evaluating predictions with pseudo-coefficients of determination," European Journal of Operational Research, Elsevier, vol. 248(3), pages 1021-1030.

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