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

See all articles by Oliver Merz

Oliver Merz

University of Zurich - Department of Business Administration (IBW)

Raphael Flepp

University of Zurich - Department of Business Administration (IBW)

Egon P. Franck

University of Zurich - Department of Business Administration (IBW)

Date Written: August 19, 2019

Abstract

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

Merz, Oliver and Flepp, Raphael and Franck, Egon P., Does Sentiment Harm Market Efficiency? An Empirical Analysis Using a Betting Exchange Setting (August 19, 2019). University of Zurich, Institute of Business Administration, UZH Business Working Paper No. 381. Available at SSRN: https://ssrn.com/abstract=3439438 or http://dx.doi.org/10.2139/ssrn.3439438

Oliver Merz (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

Raphael Flepp

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

Egon P. Franck

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich 8032
Switzerland
+41 1 634 28 45 (Phone)

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