Does Sentiment Harm Market Efficiency? An Empirical Analysis Using a Betting Exchange Setting
University of Zurich, Institute of Business Administration, UZH Business Working Paper No. 381
28 Pages Posted: 22 Aug 2019
Date Written: August 19, 2019
This paper investigates whether the sentimental preferences of investors influence market efficiency. We use a betting exchange market environment to analyze the influence of sentimental bettors on market efficiency in 2,333 soccer matches played between 2006-2014 during the last three hours of the pre-play period. Contrary to bookmaker markets, there is no intermediary in a betting exchange and, thus, the market prices solely reflect the beliefs of person to person betting. We use three different proxy variables to measure the bettor sentiment and find that price changes are more likely to be inefficient for betting events that are more prone to sentiment. Based on that finding, we propose a trading strategy that generates positive returns before considering the transaction costs and commission fees. Although the returns turn negative after considering the transaction costs and commission fees, the proposed trading strategy still outperforms a random betting strategy.
Keywords: Sentiment Bias, Market Efficiency, Forecasting, Betting markets, Soccer
JEL Classification: D40, G40, L83
Suggested Citation: Suggested Citation