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Optimal Determination of Bookmakers' Betting Odds: Theory and Tests

Author

Listed:
  • John Fingleton
  • Patrick Waldron

Abstract

This paper develops a theoretical model of how bookmakers' odds are determined, given varying levels of inside information on the part of punters. Bookmakers' attitudes towards risk and the degree of competition between them will influence bookmaker behaviour. Using a data set of 1,696 races in Ireland in 1993, we find that bookmakers are extremely risk-averse, and estimate that operating costs and monopoly rents combined account for up to 4 per cent of turnover and that between 3.1 and 3.7 per cent of betting is by punters with inside information.

Suggested Citation

  • John Fingleton & Patrick Waldron, 1996. "Optimal Determination of Bookmakers' Betting Odds: Theory and Tests," Economics Technical Papers 969, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduet:969
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    Cited by:

    1. William Hurley & Lawrence McDonough, 2007. "Imperfect Market-Maker Competition, Heterogeneous Expectations, and The Favourite-Longshot Bias in Wagering Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 1(1), pages 3-12, February.
    2. David Peel & David Law & Michael Cain, 2000. "Product bundling and a rule of thumb versus the Harville formulae: can each way bets with UK bookmakers generate abnormal returns," Applied Economics, Taylor & Francis Journals, vol. 32(13), pages 1737-1744.
    3. M. Cain & D. Law & D. A. Peel, 2003. "Some analysis of the properties of the Harville place formulae when allowance is made for the favourite-long shot bias employing Shin Win probabilities," Applied Economics Letters, Taylor & Francis Journals, vol. 10(1), pages 53-57.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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