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Costs, biases and betting markets: new evidence

  • Michael A. Smith
  • David Paton
  • Leighton Vaughan-Williams

In recent years, person-to-person wagering on Internet ‘betting exchanges’ (sometimes known as ‘matched betting’) has become an increasingly important medium for betting on horse racing, sports and special events. Established gambling operators have argued that betting exchanges should not be allowed on the grounds that they represent unfair competition. In this paper, we argue that, in fact, betting exchanges have brought about reductions in traditional market biases and significant efficiency gains by lowering transaction costs for consumers. As such, the growth of exchange betting should be viewed as a welcome and innovatory phenomenon whereby allocative efficiency in the gambling market is improved. We test this hypothesis using data on UK horse racing from betting exchanges and from traditional betting media. We find a monotonic negative relationship between transaction costs and market efficiency. Further, in contrast to traditional betting media, we find that betting exchanges exhibit both weak and strong form market efficiency.

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File URL: http://www.ntu.ac.uk/research/document_uploads/31290.pdf
File Function: First version, 2004
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Paper provided by Nottingham Trent University, Nottingham Business School, Economics Division in its series Working Papers with number 2004/5.

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Date of creation: Sep 2004
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Handle: RePEc:nbs:wpaper:2004/5
Contact details of provider: Web page: http://www.ntu.ac.uk/nbs

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  1. Michael Cain & David Law & David Peel, 2003. "The Favourite-Longshot Bias, Bookmaker Margins and Insider Trading in a Variety of Betting Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 55(3), pages 263-273, 07.
  2. Terrell, Dek & Farmer, Amy, 1996. "Optimal Betting and Efficiency in Parimutuel Betting Markets with Information Costs," Economic Journal, Royal Economic Society, vol. 106(437), pages 846-68, July.
  3. 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.
  4. David Paton & Leighton Vaughan Williams, 2005. "Forecasting outcomes in spread betting markets: can bettors use 'quarbs' to beat the book?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(2), pages 139-154.
  5. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-85, September.
  6. Raymond D. Sauer, 1998. "The Economics of Wagering Markets," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2021-2064, December.
  7. Vaughan Williams, Leighton, 1999. "Information Efficiency in Betting Markets: A Survey," Bulletin of Economic Research, Wiley Blackwell, vol. 51(1), pages 1-30, January.
  8. Law, David & Peel, David A, 2002. "Insider Trading, Herding Behaviour and Market Plungers in the British Horse-Race Betting Market," Economica, London School of Economics and Political Science, vol. 69(274), pages 327-38, May.
  9. David Paton & Leighton Vaughan Williams, 1998. "Do betting costs explain betting biases?," Applied Economics Letters, Taylor & Francis Journals, vol. 5(5), pages 333-335.
  10. 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.
  11. Williams, Leighton Vaughan & Paton, David, 1997. "Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?," Economic Journal, Royal Economic Society, vol. 107(440), pages 150-58, January.
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