Market Efficiency and Continuous Information Arrival: Evidence from Prediction Markets

30 Pages Posted: 28 Feb 2011

Date Written: February, 28 2011

Abstract

Two regularities in financial economics are that prices underreact to news events and that they display short-term momentum. This paper tests for the presence of these regularities in prediction markets offered by the betting exchange Betfair on the 2008 Ryder Cup Golf Competition. Betfair offered in-play prediction markets on the individual match-play pairings and on the Cup result, with trading being virtually continuous in all markets.

Modelled probabilities of the Cup result were updated continuously using trades in the individual match-play pairings. These probabilities were then compared with the probabilities of the Cup result implied by odds in that market.

The odds in the market for the Cup result underreact to both good and bad news that is provided by changes in the odds in the markets for the individual pairings. Further, these modelled probabilities Granger cause changes in the probabilities of the Cup result implied by odds in the market on that outcome. In addition, economically and statistically significant evidence of momentum is found in the odds in the market on the Cup result.

Suggested Citation

Docherty, Paul and Easton, Stephen Andrew, Market Efficiency and Continuous Information Arrival: Evidence from Prediction Markets (February, 28 2011). Finance and Corporate Governance Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1772811 or http://dx.doi.org/10.2139/ssrn.1772811

Paul Docherty (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Stephen Andrew Easton

University of Newcastle ( email )

University Drive
Callaghan, nsw 2308
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
58
Abstract Views
503
rank
356,551
PlumX Metrics