Johnson, J.E.V. and Bruce, A.C.
An exploration of inefficiency in a market for state contingent claims , Southampton, UK University of Southampton
(Discussion Papers in Accounting and Management Science, 99-144).
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This paper apportions responsability for inefficency in a market for state contingent claims between market makers and traders. We specifically examine the origins of a frequently observed distortion in the market for bets in horseraces- the favorite- longshot bias. Previous studies rationalise the bias in terms of traders' (bettors) or market makers' (bookmakers) behaviour. Employing hitherto unavailable data we conduct a parallel logistic analysis of parimutuel and bookmakers markets, which offers an uniquivocal basis for identifying the origin of the bias
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