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Extending the price constraints of betting markets

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  • Axén, Gustav
  • Cortis, Dominic

Abstract

The no-arbitrage conditions on betting markets are well-known and a prerequisite for the market to adhere to elementary rationality assumptions. In this paper, we also apply the criteria that no asset should be dominated if the pricing is rational, and show that the market odds need to adhere to additional constraints to account for this. Our developments illustrate an important difference between the cases of back and lay bets that, remarkably, is resolved with analogous results. The novel results can be used as constraints in modeling of betting markets, an aid in optimizing betting portfolios, or as empirical tests of bettor rationality.

Suggested Citation

  • Axén, Gustav & Cortis, Dominic, 2019. "Extending the price constraints of betting markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 181-188.
    • Handle: RePEc:eee:beexfi:v:23:y:2019:i:c:p:181-188
    DOI: 10.1016/j.jbef.2019.07.001
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    References listed on IDEAS

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    1. Manski, Charles F., 2006. "Interpreting the predictions of prediction markets," Economics Letters, Elsevier, vol. 91(3), pages 425-429, June.
    2. Sveinung Arnesen & Ole Bergfjord, 2014. "Prediction markets vs polls – an examination of accuracy for the 2008 and 2012 elections," Journal of Prediction Markets, University of Buckingham Press, vol. 8(3), pages 24-33.
    3. Dominic Cortis, 2015. "Expected Values And Variances In Bookmaker Payouts: A Theoretical Approach Towards Setting Limits On Odds," Journal of Prediction Markets, University of Buckingham Press, vol. 9(1), pages 1-14.
    4. repec:reg:rpubli:460 is not listed on IDEAS
    5. Stark, Dudley & Cortis, Dominic, 2017. "Balancing The Book: Is It Necessary And Sufficient?," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 11(1), pages 1-6.
    6. Buhagiar, Ranier & Cortis, Dominic & Newall, Philip W.S., 2018. "Why do some soccer bettors lose more money than others?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 18(C), pages 85-93.
    7. Steven D. Levitt, 2004. "Why are gambling markets organised so differently from financial markets?," Economic Journal, Royal Economic Society, vol. 114(495), pages 223-246, April.
    8. repec:cup:judgdm:v:13:y:2018:i:6:p:501-508 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Gustav Axén & Dominic Cortis, 2020. "Hedging on Betting Markets," Risks, MDPI, vol. 8(3), pages 1-14, August.
    2. repec:cup:judgdm:v:14:y:2019:i:5:p:605-607 is not listed on IDEAS
    3. Philip W. S. Newall & Dominic Cortis, 2019. "High-stakes hedges are misunderstood too. A commentary on: “Valuing bets and hedges: Implications for the construct of risk preferenceâ€," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 14(5), pages 605-607, September.

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    More about this item

    Keywords

    Betting; Arbitrage; Prediction markets; Dutching; Incomplete market;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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