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The impact of the disposition effect on asset prices: insight from the NBA

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  • Richard Borghesi

Abstract

In this paper we examine the price movements of contracts that represent bets on NBA games and find that the disposition effect causes significant deviations between contract prices and values. The contracts under examination are listed on Tradesports, a prediction market which provides an ideal venue for testing this and other behavioral theories because of its asset properties, market structure, and the absence of the joint hypothesis problem. In our analysis, we forecast the projected final combined scores of both teams in a contest based on observed within-game scores and game time remaining. At all points in time throughout each game, mean future returns (measured as Ticks to Expiry) should be no different than zero. However, we find that contracts which have fallen off pace to exceed the stated contract total become overpriced and experience negative future returns. Likewise, we provide evidence that contracts on games in which teams are on pace to exceed the stated total become underpriced and experience significantly positive future returns. These findings are consistent with the disposition effect in which traders tend to hold losing positions to avoid realizing losses yet prematurely unwind winning positions to realize gains. Copyright Springer Science+Business Media New York 2014

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  • Richard Borghesi, 2014. "The impact of the disposition effect on asset prices: insight from the NBA," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 698-711, October.
    • Handle: RePEc:spr:jecfin:v:38:y:2014:i:4:p:698-711
    DOI: 10.1007/s12197-013-9260-4
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    References listed on IDEAS

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    1. Kaustia, Markku, 2010. "Prospect Theory and the Disposition Effect," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 791-812, June.
    2. Andrea Frazzini, 2006. "The Disposition Effect and Underreaction to News," Journal of Finance, American Finance Association, vol. 61(4), pages 2017-2046, August.
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    4. Nicholas Barberis & Wei Xiong, 2009. "What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation," Journal of Finance, American Finance Association, vol. 64(2), pages 751-784, April.
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    10. Richard Borghesi, 2009. "An Examination of Prediction Market Efficiency: NBA Contracts on Tradesports," Journal of Prediction Markets, University of Buckingham Press, vol. 3(2), pages 65-77, August.
    11. Wolfers, Justin & Zitzewitz, Eric, 2006. "Five Open Questions About Prediction Markets," CEPR Discussion Papers 5562, C.E.P.R. Discussion Papers.
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    16. Richard Borghesi, 2007. "Price Biases in a Prediction Market: NFL Contracts on Tradesports," Journal of Prediction Markets, University of Buckingham Press, vol. 1(3), pages 233-253, December.
    17. Richard Borghesi, 2013. "Can Prediction Markets Mitigate Price Biases?," Journal of Prediction Markets, University of Buckingham Press, vol. 7(1), pages 1-12.
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    Cited by:

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    2. Pascal Flurin Meier & Raphael Flepp & Egon Franck, 2021. "Are sports betting markets semistrong efficient? Evidence from the COVID-19 pandemic," Working Papers 387, University of Zurich, Department of Business Administration (IBW).
    3. Marco Pleßner, 2017. "The disposition effect: a survey," Management Review Quarterly, Springer, vol. 67(1), pages 1-30, February.

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    More about this item

    Keywords

    Disposition effect; Tradesports; Prediction market; NBA; Totals; G02; G12; G14;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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