Betting Against Momentum

Abstract

This study conducts out-of-sample tests for behavioral theories of momentum based on 13,500 idiosyncratic sports betting contracts from the world's largest betting exchange. The findings reveal that a strategy that 'Bets Against Momentum' yields a statistically significant daily return of 4.14%, which persists due to transaction costs. Additionally, in-game trading data demonstrate that, while the momentum premium is initially pronounced, it is sequentially rectified by the arrival of in-game information. Highlighting trader overreaction and subsequent price correction in an environment free from systematic risk, these results corroborate the behavioral overreaction view on momentum premia and challenge the conventional understanding of the role of systemic risk in these phenomena.

Keywords: G11, G14, G40

JEL Classification: G11, G14, G40