Prediction Accuracy of Different Market Structures - Bookmakers Versus a Betting Exchange

Abstract

There is a well-established literature on separately testing the prediction power of different betting market settings. This paper provides an inter-market comparison of the forecasting accuracy between bookmakers and a major betting exchange. Employing a dataset covering all football matches played in the major leagues of the “Big Five” (England, France, Germany, Italy, Spain) during three seasons (5478 games in total), we find evidence that the betting exchange provides more accurate predictions of the same underlying event than bookmakers. A simple betting strategy of selecting bets for which bookmakers offer lower probabilities (higher odds) than the bet exchange generates above average and, in some cases, even positive returns.

Keywords: prediction accuracy, betting, bookmaker, bet exchange, probit regression

JEL Classification: D12, D21, D81, G14