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Does sentiment harm market efficiency? An empirical analysis using a betting exchange setting


  • Oliver Merz

    () (Department of Business Administration, University of Zurich)

  • Raphael Flepp

    () (Department of Business Administration, University of Zurich)

  • Egon Franck

    () (Department of Business Administration, University of Zurich)


This paper investigates whether the sentimental preferences of investors influence market efficiency. We use a betting exchange market environment to analyze the influence of sentimental bettors on market efficiency in 2,333 soccer matches played between 2006-2014 during the last three hours of the pre-play period. Contrary to bookmaker markets, there is no intermediary in a betting exchange and, thus, the market prices solely reflect the beliefs of person to person betting. We use three different proxy variables to measure the bettor sentiment and find that price changes are more likely to be inefficient for betting events that are more prone to sentiment. Based on that finding, we propose a trading strategy that generates positive returns before considering the transaction costs and commission fees. Although the returns turn negative after considering the transaction costs and commission fees, the proposed trading strategy still outperforms a random betting strategy.

Suggested Citation

  • Oliver Merz & Raphael Flepp & Egon Franck, 2019. " Does sentiment harm market efficiency? An empirical analysis using a betting exchange setting," Working Papers 381, University of Zurich, Department of Business Administration (IBW).
  • Handle: RePEc:zrh:wpaper:381

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    More about this item


    Sentiment bias; Market efficiency; Forecasting; Betting markets; Soccer;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism


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