Testing price efficiency of fundamental information in financial markets using a multi-stage modelling methodology employed in racetrack betting market studies

Abstract

This paper applies multi-stage modelling methods from sports betting market research to test for semi-strong form efficiency in financial markets. Specifically, modelling methods from racetrack betting market studies are applied to the UK equities market to determine the extent to which publicly available fundamental information is priced. Fundamental variables are modelled using the logit regression technique to study monthly returns. The out-of-sample results reject the null hypothesis and confirm that financial markets are not semi-strong form efficient for all the securities when multi-stage modelling techniques are utilised. A Kelly betting strategy yields positive returns in the out-of-sample period, outperforming benchmarks, including FTSE-100, suggesting that the multi-stage racetrack betting modelling methodology extracts information that has not been priced by the financial markets.

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