Asset Pricing and Sports Betting

Abstract

Sports betting markets offer a novel laboratory to test theories of cross-sectional asset pricing anomalies. Two features of this market – no systematic risk and terminal values exogenous to betting activity – evade the joint hypothesis problem, allowing mispricing to be detected. Examining a large and diverse set of liquid betting contracts, I find strong evidence of momentum, consistent with delayed overreaction and inconsistent with underreaction and rational pricing. Returns are a fraction of those in financial markets and fail to overcome transactions costs, preventing arbitrage from eliminating them. An insight from betting also predicts value and momentum returns in U.S. equities.