On the Efficiency of Racetrack Betting Market: A New Test for the Favorite-Longshot Bias

A number of empirical researches on the efficiency of racetrack betting market have shown the ¡®favorite-longshot bias,¡¯ which means longshots are overbet while favorites are underbet. Asian markets such as Hong Kong and Japan, however, have produced some contradictory empirical evidence to the bias. One critical element in the efficiency test procedure is how to assess the unobservable objective winning probability of a horse in a race. This paper proposes a new test framework with a more general evaluation of the objective probability of winning than the traditional method. Unlike the traditional method, our model allows the heterogeneity of the horses and the races. We apply the new empirical method to test whether the favorite-longshot bias is present in racetrack betting market of Korea. We found that the favorite-longshot bias exists in the racetrack market of Korea and the result distinguishes Korean racetrack market from other Asian markets.