MEASURING THE EXTENT OF INSIDE TRADING IN HORSE BETTING MARKETS

Main Article Content

Adi Schnytzer
Martien Lamers
Vasiliki Makropoulou

Abstract

This paper develops a theoretical framework for and models optimal price setting by on-course bookmakers in the racetrack betting market. This framework suggests that opening prices should include a premium that compensates bookmakers for the risk that insiders will account for private information and exploit any mis-pricing made by the bookmakers. The model is an extension of the model developed by Makropoulou and Markellos (2007) for football betting to the racetrack betting market. Using an extensive dataset and performing Monte Carlo simulations to calculate the potential value of new information, we measure insider trading in the Australian racetrack betting market.

Article Details

Section
Articles

References

Dowie, J. (1976). On the Efficiency and Equity of Betting Markets. Economica, 43(170), 139-150.

Foster, F. D., & Vishwanath, S. (1996). Strategic Trading When Agents Forecast the Trades of Others. Journal of Finance, 51, 1437-1477.

Jackson, M. (1991). Equilibrium, Price formation and the Private Information. Review of Financial Studies 4, 1-16.

Kyle, A. S. (1989). Speculation with Imperfect Competition. Review of Economic Studies 56, 317-355.

Makropoulou, V., & Markellos, R. N. (2007). Optimal Price Setting in Fixed-Odds Betting Markets Under Information Uncertainty. Retrieved May 20, 2008, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=963423

Ottaviani, M., & Sørensen, P. N. (2005). Parimutuel versus Fixed-Odds Markets. mimeo, London Business School and University of Copenhagen.

Schnytzer, A., & Shilony, Y. (1995). Inside Information in a Betting Market. The Economic Journal, 105, 963-971.

Schnytzer, A., & Shilony, Y. (2002). On the Timing of Inside Trades in a Betting Market. The European Journal of Finance 8(2), 176-186.

Schnytzer, A., & Shilony, Y. (2003). Is the Presence of Insider Trading Necessary to Give Rise to a Favourite-Longshot Bias? In L. Vaughan Williams (Ed.), The Economics of Gambling (pp. 14-17): Routledge.

Schnytzer, A., Shilony, Y., & Thorne, R. (2003). On the Marginal Impact of Information and Arbitrage. In L. Vaughan Williams (Ed.), The Economics of Gambling (pp. 80-94): Routledge.

Schnytzer, A., & Snir, A. (2008a). SP Betting as a Self-Enforcing Implicit Cartel. Journal of Gambling Business and Economics, 2(1), 45-65.

Schnytzer, A., & Snir, A. (2008b). Herding in Imperfect Markets with Inside Traders. Journal of Gambling Business and Economics, 2(2), 1-16.

Shin, H. S. (1991). Optimal betting odds against insider traders. The Economic Journal, 101 1179-1185.

Shin, H. S. (1992). Prices of state contingent claims with insider traders, and the favourite-longshot bias. The Economic Journal, 102, 426-435.

Shin, H. S. (1993). Measuring the incidence of insider trading in a market for state-contingent claims. The Economic Journal, 103, 1141-1153.

Sung, M. C., & Johnson, J. E. V. (2007). Revealing weak-form inefficiency in a market for state contingent claims. mimeo.

Vaughan Williams, L., & Paton, D. (1997). Why is there a favourite longshot bias in British racetrack betting markets? The Economic Journal, 107, 150-158.