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The Role of Speculative Trade in Market Efficiency: Evidence from a Betting Exchange

Author

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  • Alasdair Brown

    (University of East Anglia)

  • Fuyu Yang

    (University of East Anglia)

Abstract

Does speculative trade reduce mispricing - and help create efficient markets - or drive prices further from fundamentals? We analyse betting exchange trading, on 9,562 U.K. horse races in 2013 and 2014, to find out. Crucially, as each race is run, the fundamental value of bets is unambiguously revealed. We find that the direction and volume of market order trade is predictive of fundamentals, suggesting that speculative trade is, on average, conducive to market efficiency. However, much of this effect is concentrated in the in-running period (during races) - when, even without trade, asset fundamentals would be revealed seconds later.

Suggested Citation

  • Alasdair Brown & Fuyu Yang, 2014. "The Role of Speculative Trade in Market Efficiency: Evidence from a Betting Exchange," University of East Anglia Applied and Financial Economics Working Paper Series 068, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:aepppr:2012_68
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    File URL: https://archive.uea.ac.uk/menu/depts/eco/research/RePEc/uea/papers_pdf/UEA-AFE-068.pdf
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    References listed on IDEAS

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    8. 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 150-158, January.
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    11. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2010. "O/S: The relative trading activity in options and stock," Journal of Financial Economics, Elsevier, vol. 96(1), pages 1-17, April.
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    Cited by:

    1. Alasdair Brown & Fuyu Yang, 2014. "Have Betting Exchanges Corrupted Horse Racing?," University of East Anglia Applied and Financial Economics Working Paper Series 066, School of Economics, University of East Anglia, Norwich, UK..
    2. Alasdair Brown & Fuyu Yang, 2015. "Salience and the Disposition Effect: Evidence from the Introduction of `Cash-Outs' in Betting Markets," University of East Anglia Applied and Financial Economics Working Paper Series 071, School of Economics, University of East Anglia, Norwich, UK..
    3. Alasdair Brown & Dooruj Rambaccussing & James Reade & Giambattista Rossi, 2016. "Using Social Media to Identify Market Inefficiencies: Evidence from Twitter and Betfair," Economics & Management Discussion Papers em-dp2016-01, Henley Business School, Reading University.
    4. Alasdair Brown & Dooruj Rambaccussing & J. James Reade & Giambattista Rossi, 2016. "Using Social Media to Identify Market Ine!ciencies: Evidence from Twitter and Betfair," Working Papers 2016-002, The George Washington University, Department of Economics, Research Program on Forecasting.
    5. Alasdair Brown & Fuyu Yang, 2015. "Adverse Selection, Speed Bumps and Asset Market Quality," University of East Anglia Applied and Financial Economics Working Paper Series 070, School of Economics, University of East Anglia, Norwich, UK..

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