Dynamic Learning and Market Making in Spread Betting Markets With Informed Bettors

64 Pages Posted: 7 Dec 2018

See all articles by John R. Birge

John R. Birge

University of Chicago - Booth School of Business

Yifan Feng

University of Chicago - Booth School of Business

N. Bora Keskin

Duke University - Fuqua School of Business

Adam Schultz

Wealthfront, Inc.

Date Written: November 12, 2018

Abstract

We study the profit maximization problem of a market maker in a spread betting market for a future event. Anonymous bettors with heterogeneous strategic behavior and information levels participate in the market. The market maker is initially uninformed of the event outcome distribution, aiming to extract information from the market (i.e., "learning") while guarding against an informed bettor's strategic manipulation via bets (i.e., "bluff-proofing"). We show that Bayesian policies that ignore bluffing are typically vulnerable to the informed bettor's manipulation. We propose a novel family of policies, called inertial policies, that balance the tradeoff between learning and bluff-proofing, achieving an expected regret up to a logarithmic factor of the number of bets.

Keywords: spread betting market, market making, sequential learning, market manipulation, prediction markets, sports analytics

Suggested Citation

Birge, John R. and Feng, Yifan and Keskin, N. Bora and Schultz, Adam, Dynamic Learning and Market Making in Spread Betting Markets With Informed Bettors (November 12, 2018). Available at SSRN: https://ssrn.com/abstract=3283392 or http://dx.doi.org/10.2139/ssrn.3283392

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Yifan Feng

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://sites.google.com/view/yifanfeng/

N. Bora Keskin (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States

HOME PAGE: http://faculty.fuqua.duke.edu/~nk145/

Adam Schultz

Wealthfront, Inc. ( email )

900 Middlefield Rd
Redwood City, CA 94063
United States

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