Weak form efficiency and pricing dynamics in a competitive globalised market setting

Abstract

Employing data from the football betting market, we explore the impact of institutional structure on price-setting in speculative markets and the extent to which the biases induced by such factors might cause prices to deviate from fundamental values. In Chapter 1, we review the literature on football betting markets with regards to the Efficient Market Hypothesis (EMH) and find that despite sporadic evidence of pricing anomalies, more consistent and persistent evidence of exploitable betting opportunities is required for the EMH to be rejected.
In Chapter 2, we investigate the favourite-longshot bias in the bookmaker market and find that the bias is persistent over a long period of time and related to the parity of the league. A traditional price-setting bookmaker is willing to pay a premium to stimulate overall bettor demand in a competitive market, by setting generous odds on favourites to attract customers. In leagues with more parity among teams, the apparent bias is reduced as the market requires less intervention on the part of the bookmaker.
Heterogeneity in bookmaker operations and price-setting is the focus of Chapter 3. We categorize bookmakers as either position-takers or book-balancers. Position-takers operate a high-margin, low-turnover business model, rarely adjust their odds, and actively eschew informed traders. Book-balancers frequently change their prices, and operate under the alternative, high-turnover, low-margin strategy. Sophisticated traders are not restricted at book-balancing bookmakers, and as such, odds movements at position-takers lag converge in the direction of the odds at book-balancers. We conclude that the sophisticated traders aid the price discovery process at the book-balancing bookmakers, which leads the market to efficiency.
Finally, in Chapter 4 we examine instances of significant dispersion between the two types of bookmakers and show that the generation of positive returns is theoretically possible. However, closer investigation of these finding reveals that market-makers’ odds are efficient predictors of event outcomes and therefore, the opportunity to generate profit is provided by biases in position-takers’ pricing. Such biases could either be intentional for the purpose of attracting customers or the result of such bookmakers’ odds lagging behind in reflecting upcoming information. In all cases, such bookmakers are very likely to pose restrictions successful traders and therefore, the exploitation of the documented anomaly is probably infeasible.

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