Pricing Decisions and Insider Trading in Horse Betting Markets
This paper builds on a theoretical model by Schnytzer, Lamers, and Makropoulou (2010) that conceptualizes fixed odds horse betting markets as implicit call option markets. We model the decision making process of a bookmaker that sets his prices under uncertainty. We extend the paper of Schnytzer et al. (2010) by relaxing some assumptions and allowing for betting at multiple time periods. We show that when a bookmaker follows this pricing process built upon implicit options, the returns will exhibit a favorite-longshot bias. By performing Monte Carlo simulations we generate the option values and are able to measure the degree of insider trading, which we find to be around 60% in our dataset.
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Vasiliki Makropoulou & Raphael N. Markellos, 2011. "Optimal Price Setting In Fixed‐Odds Betting Markets Under Information Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(4), pages 519-536, 09.
- 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.
- Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-85, September.
- Adi Schnytzer & Yuval Shilony, 2002. "On the timing of inside trades in a betting market," The European Journal of Finance, Taylor & Francis Journals, vol. 8(2), pages 176-186, June.
- Richard E. Quandt, 1986. "Betting and Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 101(1), pages 201-207.
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