The impact of insider trading on forecasting in a bookmakers' horse betting market
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 etÂ al. (2008) or this paper are price data, this is tantamount to a demonstration that the market is, in practice, weak-form efficient.
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References listed on IDEAS
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- 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 426-435, March.
- Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
- 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.
- 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.
- Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2009.
"Measuring the Extent of Inside Trading in Horse Betting Markets,"
2009-10, Bar-Ilan University, Department of Economics.
- Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2010. "Measuring the Extent of Inside Trading in Horse Betting Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 4(2), pages 21-41, September.
- Schnytzer, Adi & Shilony, Yuval, 1995. "Inside Information in a Betting Market," Economic Journal, Royal Economic Society, vol. 105(431), pages 963-971, July.
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