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Fixed Odds Bookmaking with Stochastic Betting Demands

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  • Stewart Hodges
  • Hao Lin
  • Lan Liu

Abstract

This paper studies fixed odds bookmaking in the market for bets in a British horse race. The bookmaker faces the risk of unbalanced liability exposures. Even random shocks in the noisy betting demands are costly to the bookmaker since his book could become less balanced. In our model, the bookmaker sets appropriate odds to influence the betting flow to mitigate the risk. The stylised fact of the favourite†longshot bias only arises from the model under specific assumptions. Our model offers insights into the complexity of managing a series of state contingent exposures such as options.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:eufman:v:19:y:2013:i:2:p:399-417
    DOI: 10.1111/j.1468-036X.2010.00601.x
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    2. Christian Deutscher & David Winkelmann & Marius Otting, 2020. "Bookmakers' mispricing of the disappeared home advantage in the German Bundesliga after the COVID-19 break," Papers 2008.05417, arXiv.org, revised Aug 2020.
    3. Lorig, Matthew & Zhou, Zhou & Zou, Bin, 2021. "Optimal bookmaking," European Journal of Operational Research, Elsevier, vol. 295(2), pages 560-574.
    4. Matthew Lorig & Zhou Zhou & Bin Zou, 2019. "Optimal Bookmaking," Papers 1907.01056, arXiv.org, revised Mar 2021.
    5. David Winkelmann & Christian Deutscher & Marius Ötting, 2021. "Bookmakers’ mispricing of the disappeared home advantage in the German Bundesliga after the COVID-19 break," Applied Economics, Taylor & Francis Journals, vol. 53(26), pages 3054-3064, June.

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