Informational Efficiency and Behaviour Within In-Play Prediction Markets

42 Pages Posted: 8 Jan 2020 Last revised: 13 Apr 2021

See all articles by Giovanni Angelini

Giovanni Angelini

University of Bologna - School of Economics, Management, and Statistics

Luca De Angelis

University of Bologna - Department of Economics

Carl Singleton

University of Stirling - School of Management

Date Written: October 17, 2020

Abstract

Studies of financial market informational efficiency have proven burdensome in practice, because it is difficult to pinpoint when news breaks and is known by some or all the participants. We overcome this by designing a framework to detect mispricing, test informational efficiency and evaluate the behavioural biases within high-frequency prediction markets. We demonstrate this using betting exchange data for association football, exploiting the moment when the first goal is scored in a match as major news that breaks cleanly. There are pre-match and in-play mispricing and inefficiency in these markets, explained by reverse favourite-longshot bias (favourite bias). The mispricing tends to increase when the major news is a surprise, such as a goal scored by a longshot team late in a match, with the market underestimating their chances of going on to win. These results suggest that, even in prediction markets with large crowds of participants trading state-contingent claims, significant informational inefficiency and behavioural biases can be reflected in prices.

Keywords: Market Efficiency, Favourite-Longshot Bias, Mispricing, Behavioural Bias, Betting Strategy

JEL Classification: C58, D01, G14, G41, L83, Z2

Suggested Citation

Angelini, Giovanni and De Angelis, Luca and Singleton, Carl, Informational Efficiency and Behaviour Within In-Play Prediction Markets (October 17, 2020). Available at SSRN: https://ssrn.com/abstract=3505287 or http://dx.doi.org/10.2139/ssrn.3505287

Giovanni Angelini

University of Bologna - School of Economics, Management, and Statistics ( email )

40126 Bologna
Italy

Luca De Angelis (Contact Author)

University of Bologna - Department of Economics ( email )

Bologna
Italy

Carl Singleton

University of Stirling - School of Management ( email )

Stirling, FK9 4LA
United Kingdom

HOME PAGE: http://https://www.carlsingletoneconomics.com/

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