Informational Efficiency and Price Reaction Within In-Play Prediction Markets
34 Pages Posted: 8 Jan 2020
Date Written: December 17, 2019
We propose a practical framework to detect mispricing, test informational efficiency and evaluate the behavioural biases within high-frequency prediction markets, especially in how prices react to news. We show this using betting exchange data for association football, exploiting the moment when the first goal is scored in a match as major news that breaks cleanly. There is mispricing in these markets and inefficiency, explained by reverse favourite-longshot bias. This is systematically absorbed or amplified after a goal, depending on the match conditions. We find that prices respond correctly when news is expected but overreact when it is a surprise.
Keywords: Market Efficiency, Favourite-Longshot Bias, Mispricing, Sports Forecasting, Probability Forecasting, Behavioural Bias, Betting Strategy
JEL Classification: G14, D01, L83, C58, Z2
Suggested Citation: Suggested Citation