Betting Without Beta
93 Pages Posted: 17 May 2021 Last revised: 2 May 2022
Date Written: May 2, 2022
Sports betting markets offer a novel test distinguishing the roles of preferences and beliefs in asset prices. Analyzing two contracts on the same outcome – one where payoff risk varies with expected outcome (Moneyline) and one where it does not (Spread) – we find that preferences for lottery-like payoffs, rather than incorrect beliefs, drive the lower returns to betting on risky underdogs versus safe favorites. Drawing parallels to low-risk anomalies in financial markets, we find the magnitude of pricing effects matches those in options and equity markets, with a model of lottery preferences providing a unifying explanation.
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