The Role of Surprise: Understanding Overreaction and Underreaction to Unanticipated Events using In-Play Soccer Betting Market

43 Pages Posted: 27 Feb 2012 Last revised: 27 Feb 2014

See all articles by Darwin Choi

Darwin Choi

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Sam K. Hui

New York University (NYU) - Department of Marketing

Date Written: February 9, 2013

Abstract

Previous research in finance has found evidences of both overreaction and underreaction to unanticipated events, but has yet to explain why investors overreact to certain events while underreacting to others. In this paper, we hypothesize that while market participants generally underreact to new events due to conservatism, the extent of underreaction is moderated by “surprise,” thus causing market participants to overreact to events that are highly surprising. We test our hypothesis using data from an in-play soccer betting market, where new events (goals) are clearly and exogenously defined, and the degree of “surprise” can be directly quantified (goals scored by underdogs are more surprising). We provide both statistical and economic evidences in support of our hypothesis.

Keywords: over/underreaction, unanticipated events, surprise, conservatism, prediction market, Bayesian dynamic model

JEL Classification: D84, G13, G14

Suggested Citation

Choi, Darwin and Hui, Sam K., The Role of Surprise: Understanding Overreaction and Underreaction to Unanticipated Events using In-Play Soccer Betting Market (February 9, 2013). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2011564 or http://dx.doi.org/10.2139/ssrn.2011564

Darwin Choi (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Sam K. Hui

New York University (NYU) - Department of Marketing ( email )

Henry Kaufman Ctr
44 W 4 St.
New York, NY
United States

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