Optimal Pricing in the Online Betting Market
36 Pages Posted: 11 Jan 2013 Last revised: 16 Jan 2016
Date Written: January 01, 2016
I find that the optimal price of a bet for a risk-averse bookmaker is a function of elasticity of demand and the number of outcomes of the betting event. In the presence of shocks in the order flow, however, the optimal price can change, and large adjustments can create arbitrage opportunities for informed investors. Using a large sample of online bookmakers and a unique data set of real-time betting odds, I find strong support for these predictions. The results suggest that bookmakers' attitude towards risk is a key driver of prices in the betting market.
Keywords: Betting market; Market efficiency; Risk-aversion; Arbitrage
JEL Classification: G10; G12; G14
Suggested Citation: Suggested Citation