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Is one price enough to value a state-contingent asset correctly? Evidence from a gambling market

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  • Michael Cain
  • David Law
  • David Peel

Abstract

The answer to this question, based on a study of 1000 greyhound races, is 'no'. Although the efficient markets hypothesis asserts that speculative market prices optimally encapsulate all relevant information, it is found that 'Shin probabilities' (based on Shin, 1993), in which a dog's winning probability is a complicated function of the winning probabilities of all contenders in the race, correct the favouritelongshot bias, and in doing so dominate the predictive abilities of individual market prices, and of linear and non-linear functions of them. Since there is an equivalent bias in at least some financial markets, the finding may have wider application.

Suggested Citation

  • Michael Cain & David Law & David Peel, 2002. "Is one price enough to value a state-contingent asset correctly? Evidence from a gambling market," Applied Financial Economics, Taylor & Francis Journals, vol. 12(1), pages 33-38.
  • Handle: RePEc:taf:apfiec:v:12:y:2002:i:1:p:33-38
    DOI: 10.1080/09603100110102682
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    References listed on IDEAS

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    1. Figlewski, Stephen, 1979. "Subjective Information and Market Efficiency in a Betting Market," Journal of Political Economy, University of Chicago Press, vol. 87(1), pages 75-88, February.
    2. Dowie, Jack A, 1976. "On the Efficiency and Equity of Betting Markets," Economica, London School of Economics and Political Science, vol. 43(17), pages 139-150, May.
    3. Gabriel, Paul E & Marsden, James R, 1990. "An Examination of Market Efficiency in British Racetrack Betting," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 874-885, August.
    4. Martin Weitzman, 2008. "Utility Analysis And Group Behavior An Empirical Study," World Scientific Book Chapters,in: Efficiency Of Racetrack Betting Markets, chapter 9, pages 47-55 World Scientific Publishing Co. Pte. Ltd..
    5. Crafts, Nicholas F R, 1985. "Some Evidence of Insider Knowledge in Horse Race Betting in Britain," Economica, London School of Economics and Political Science, vol. 52(27), pages 295-304, August.
    6. Hyun Song Shin, 2008. "Prices Of State Contingent Claims With Insider Traders, And The Favourite-Longshot Bias," World Scientific Book Chapters,in: Efficiency Of Racetrack Betting Markets, chapter 34, pages 343-352 World Scientific Publishing Co. Pte. Ltd..
    7. Busche, Kelly & Hall, Christopher D, 1988. "An Exception to the Risk Preference Anomaly," The Journal of Business, University of Chicago Press, vol. 61(3), pages 337-346, July.
    8. Ali, Mukhtar M, 1979. "Some Evidence of the Efficiency of a Speculative Market," Econometrica, Econometric Society, vol. 47(2), pages 387-392, March.
    9. Richard N. Rosett, 1965. "Gambling and Rationality," Journal of Political Economy, University of Chicago Press, vol. 73, pages 595-595.
    10. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
    11. Snyder, Wayne W, 1978. "Horse Racing: Testing the Efficient Markets Model," Journal of Finance, American Finance Association, vol. 33(4), pages 1109-1118, September.
    12. 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.
    13. Brian R. Canfield & Bruce C. Fauman & William T. Ziemba, 1987. "Efficient Market Adjustment of Odds Prices to Reflect Track Biases," Management Science, INFORMS, vol. 33(11), pages 1428-1439, November.
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    Cited by:

    1. Lionel Page & Robert T. Clemen, 2013. "Do Prediction Markets Produce Well‐Calibrated Probability Forecasts?-super-," Economic Journal, Royal Economic Society, vol. 123(568), pages 491-513, May.

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