Are the odds odd? Positive return evidence in German horse race betting

Abstract

The article deals with the question, if odds derived from the behavior of bettors in a pari-mutuel setting really reflect the chances of winning for a particular horse in a particular race. Using a unique data set with more than 46,000 race observations from Germany for the years 2001 to 2003 the paper presents evidence on the favorite long-shot bias, evaluates the predictive power of totalizator odds, uses a binary logistic regression model to predict probabilities of winning and finally suggests three wagering strategies that actually yield positive returns in a hold-out oriented analytical setting.