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Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies

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  • M. SUNG
  • J. E. V. JOHNSON

Abstract

This paper examines the degree to which current prices discount historical prices in a market for state contingent claims. Conditional logit analysis is employed to predict winning probabilities, based on market prices in a betting market. These are used, together with various wagering strategies to yield substantial abnormal returns. Consequently, in contrast to the existing literature, the results suggest that the market is not weak form efficient. The disparity with previous efficiency studies highlights the importance of considering market ecology and of adopting an appropriate modelling procedure and investment strategy to fully exploit information contained in market prices.

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  • M. Sung & J. E. V. Johnson, 2010. "Revealing Weak‐Form Inefficiency in a Market for State Contingent Claims: The Importance of Market Ecology, Modelling Procedures and Investment Strategies," Economica, London School of Economics and Political Science, vol. 77(305), pages 128-147, January.
    • Handle: RePEc:bla:econom:v:77:y:2010:i:305:p:128-147
    DOI: 10.1111/j.1468-0335.2008.00716.x
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    Cited by:

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    2. Stewart Hodges & Hao Lin & Lan Liu, 2013. "Fixed Odds Bookmaking with Stochastic Betting Demands," European Financial Management, European Financial Management Association, vol. 19(2), pages 399-417, March.
    3. Linda M. Woodland & Bill M. Woodland, 2015. "The National Football League season wins total betting market: The impact of heuristics on behavior," Southern Economic Journal, John Wiley & Sons, vol. 82(1), pages 38-54, July.
    4. Egon Franck & Erwin Verbeek & Stephan Nüesch, 2013. "Inter-market Arbitrage in Betting," Economica, London School of Economics and Political Science, vol. 80(318), pages 300-325, April.
    5. Lessmann, Stefan & Sung, Ming-Chien & Johnson, Johnnie E.V. & Ma, Tiejun, 2012. "A new methodology for generating and combining statistical forecasting models to enhance competitive event prediction," European Journal of Operational Research, Elsevier, vol. 218(1), pages 163-174.
    6. Green, Lawrence & Sung, Ming-Chien & Ma, Tiejun & Johnson, Johnnie E. V., 2019. "To what extent can new web-based technology improve forecasts? Assessing the economic value of information derived from Virtual Globes and its rate of diffusion in a financial market," European Journal of Operational Research, Elsevier, vol. 278(1), pages 226-239.
    7. Miller, Thomas W. & Rapach, David E., 2013. "An intra-week efficiency analysis of bookie-quoted NFL betting lines in NYC," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 10-23.
    8. S Lessmann & M-C Sung & J E V Johnson, 2011. "Towards a methodology for measuring the true degree of efficiency in a speculative market," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(12), pages 2120-2132, December.

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