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'Time is money': costing the impact of duration misperception in market prices

'Time is money': costing the impact of duration misperception in market prices
'Time is money': costing the impact of duration misperception in market prices
We explore whether, and to what extent, traders in a real world financial market, where participants’ judgements are reportedly well calibrated, are subject to duration misperception. To achieve this, we examine duration misperception in the horserace betting market. We develop a two-stage algorithm to predict horses’ winning probabilities that account for a duration-related factor that is known to affect horses’ winning prospects. The algorithm adapts survival analysis and combines it with the conditional logit model. Using a dataset of 4736 horseraces and the lifetime career statistics of the 53,295 horses running in these races, we demonstrate that prices fail to discount fully information related to duration since a horse's last win. We show that this failure is extremely costly, since a betting strategy based on the predictions arising from the model shows substantial profits (932.5 percent and 16.27 percent, with and without reinvestment of winnings, respectively). We discuss the important implications of duration neglect in the wider economy.
0377-2217
397-410
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae
Tang, Leilei
59add3c2-5c1f-460c-8970-5dc0686df272
Mcgroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Sung, Ming-Chen
2114f823-bc7f-4306-a775-67aee413aa03
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae
Tang, Leilei
59add3c2-5c1f-460c-8970-5dc0686df272
Mcgroarty, Frank
693a5396-8e01-4d68-8973-d74184c03072
Sung, Ming-Chen
2114f823-bc7f-4306-a775-67aee413aa03
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4

Ma, Tiejun, Tang, Leilei, Mcgroarty, Frank, Sung, Ming-Chen and Johnson, Johnnie E.V. (2016) 'Time is money': costing the impact of duration misperception in market prices. European Journal of Operational Research, 255 (2), 397-410. (doi:10.1016/j.ejor.2016.04.044).

Record type: Article

Abstract

We explore whether, and to what extent, traders in a real world financial market, where participants’ judgements are reportedly well calibrated, are subject to duration misperception. To achieve this, we examine duration misperception in the horserace betting market. We develop a two-stage algorithm to predict horses’ winning probabilities that account for a duration-related factor that is known to affect horses’ winning prospects. The algorithm adapts survival analysis and combines it with the conditional logit model. Using a dataset of 4736 horseraces and the lifetime career statistics of the 53,295 horses running in these races, we demonstrate that prices fail to discount fully information related to duration since a horse's last win. We show that this failure is extremely costly, since a betting strategy based on the predictions arising from the model shows substantial profits (932.5 percent and 16.27 percent, with and without reinvestment of winnings, respectively). We discuss the important implications of duration neglect in the wider economy.

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SurvivalAnalysisPaper_EJORS_final.pdf - Accepted Manuscript
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More information

Accepted/In Press date: 23 April 2016
e-pub ahead of print date: 29 April 2016
Published date: December 2016
Organisations: Southampton Business School

Identifiers

Local EPrints ID: 393483
URI: http://eprints.soton.ac.uk/id/eprint/393483
ISSN: 0377-2217
PURE UUID: 1fca3596-c6c5-4131-a8a7-57ae1883fba6
ORCID for Frank Mcgroarty: ORCID iD orcid.org/0000-0003-2962-0927
ORCID for Ming-Chen Sung: ORCID iD orcid.org/0000-0002-2278-6185

Catalogue record

Date deposited: 27 Apr 2016 11:08
Last modified: 09 Jan 2022 05:24

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Contributors

Author: Tiejun Ma
Author: Leilei Tang
Author: Frank Mcgroarty ORCID iD
Author: Ming-Chen Sung ORCID iD

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