The Market Impact of Trends and Sequences in Performance: New Evidence
Carey School of Business Working Paper
33 Pages Posted: 23 Jun 2003
Date Written: May 23, 2003
This study contributes to the body of direct evidence testing behavioral finance theories, in particular evidence on market reactions to trends and patterns in performance data. Whereas Chan, Frankel, and Kothari (2002) find scant evidence that stock markets react in ways consistent with pervasive representativeness bias, Bloomfield and Hales (2002) find strong evidence that experimental market subjects are influenced by trends and patterns. We examine these issues using the football wagering market as our price laboratory. Sports betting markets have several advantages over traditional capital markets as an empirical setting, and commonalities with traditional markets allow for useful insights. The evidence in our market is mixed: Over long performance horizons, bettor behavior is consistent with the experimental subjects in Bloomfield and Hales (2002); over shorter horizons, the results are more consistent with Chan, Frankel, and Kothari (2002). We also find evidence that investors in this market behave in a manner consistent with the shifting regimes model of Barberis, Shleifer, and Vishny (1998).
Keywords: Regime Shifting Beliefs, Behavioral Finance
JEL Classification: G12, G14
Suggested Citation: Suggested Citation