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Pricing Decisions and Insider Trading in Horse Betting Markets

Author

Listed:
  • A. SCHNYTZER
  • V. MAKROPOULOU
  • M. LAMERS

Abstract

This paper builds on a theoretical model by Schnytzer, Lamers, and Makropoulou (2010) that conceptualizes fixed odds horse betting markets as implicit call option markets. We model the decision making process of a bookmaker that sets his prices under uncertainty. We extend the paper of Schnytzer et al. (2010) by relaxing some assumptions and allowing for betting at multiple time periods. We show that when a bookmaker follows this pricing process built upon implicit options, the returns will exhibit a favorite-longshot bias. By performing Monte Carlo simulations we generate the option values and are able to measure the degree of insider trading, which we find to be around 60% in our dataset.

Suggested Citation

  • A. Schnytzer & V. Makropoulou & M. Lamers, 2012. "Pricing Decisions and Insider Trading in Horse Betting Markets," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/772, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:12/772
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    File URL: http://wps-feb.ugent.be/Papers/wp_12_772.pdf
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    References listed on IDEAS

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    1. Richard E. Quandt, 1986. "Betting and Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(1), pages 201-207.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2010. "Measuring the Extent of Inside Trading in Horse Betting Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 4(2), pages 21-41, September.
    4. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
    5. Shin, Hyun Song, 1993. "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal, Royal Economic Society, vol. 103(420), pages 1141-1153, September.
    6. Adi Schnytzer & Yuval Shilony, 2002. "On the timing of inside trades in a betting market," The European Journal of Finance, Taylor & Francis Journals, vol. 8(2), pages 176-186, June.
    7. Vasiliki Makropoulou & Raphael N. Markellos, 2011. "Optimal Price Setting In Fixed‐Odds Betting Markets Under Information Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(4), pages 519-536, September.
    8. Hyun Song Shin, 2008. "Prices Of State Contingent Claims With Insider Traders, And The Favourite-Longshot Bias," World Scientific Book Chapters, in: Donald B Hausch & Victor SY Lo & William T Ziemba (ed.), Efficiency Of Racetrack Betting Markets, chapter 34, pages 343-352, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Ruud H. Koning & Renske Zijm, 2023. "Betting market efficiency and prediction in binary choice models," Annals of Operations Research, Springer, vol. 325(1), pages 135-148, June.

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    More about this item

    Keywords

    Betting; Insider Trading; Contingent Pricing;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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