Noise, Information, and the Favorite-Longshot Bias
According to the favorite-longshot bias, longshots are overbet relative to favorites. We propose an explanation for this bias (and its reverse) based on an equilibrium model of informed betting in parimutuel markets. The bias arises because bettors take positions without knowing the positions simultaneously taken by other privately informed bettors. The direction and the extent of the bias depend on the amount of private information relative to noise present in the market. With realistic ex-post noise and ex-ante asymmetries, our model replicates the main qualitative features of expected returns observed in horse races.
|Date of creation:||May 2006|
|Contact details of provider:|| Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark|
Phone: (+45) 35 32 30 10
Fax: +45 35 32 30 00
Web page: http://www.econ.ku.dk/FRU/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:kud:kuiefr:200604. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann)
If references are entirely missing, you can add them using this form.