Do Market Participants Misprice Lottery-Type Assets? Evidence from the European Soccer Betting Market

49 Pages Posted: 7 Jun 2016 Last revised: 4 Sep 2018

Maximilian Franke

Ulm University

Date Written: August 31, 2018

Abstract

This paper addresses findings from previous asset pricing research that lottery-like assets are mispriced. I add to the discussion by examining lottery-type assets on the European betting market. Betting markets offer the advantage over stock markets that market efficiency tests do not rely on potentially incorrect or incomplete asset pricing models. I use a unique data set of soccer odds covering both a betting exchange and the bookmaker market and find a favorite-longshot bias on both betting market structure. An expected utility model and a prospect theory model confirm that the favorite-longshot bias is due to misperception of probabilities rather than risk preferences. Although bookmakers also bias odds there is also evidence that bookmakers are rational in biasing odds to protect themselves from insiders and/or to increase their turnover. This conclusion is also supported by further analysis on the tennis betting market.

Keywords: favorite-longshot bias, betting exchange, bookmaker market, misperception, adverse selection, lottery-type assets

JEL Classification: D80, D81, G10, G14

Suggested Citation

Franke, Maximilian, Do Market Participants Misprice Lottery-Type Assets? Evidence from the European Soccer Betting Market (August 31, 2018). Available at SSRN: https://ssrn.com/abstract=2790850 or http://dx.doi.org/10.2139/ssrn.2790850

Maximilian Franke (Contact Author)

Ulm University

Germany

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