Information Salience and News Absorption by the Stock Market: The Peculiar Case of Betting Markets

ECGI - Finance Working Paper No. 81/2005

CentER Discussion Paper No. 2005-62

35 Pages Posted: 7 Mar 2006

See all articles by Frédéric Palomino

Frédéric Palomino

EDHEC Business School - Department of Economics & Finance

Chendi Zhang

University of Warwick - Finance Group

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Date Written: December 2005

Abstract

Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news. For each firm, two pieces of information are released on a weekly basis: experts' expectations about game outcomes through the betting odds, and the game outcomes themselves. Stock markets react strongly to news about game results, generating significant abnormal returns and trading volumes. Due to the absence of a market reaction to betting odds and the fact that these odds are excellent predictors of game outcomes, these odds contain unpriced information and can be used to predict short-run stock returns. A naïve trading rule based on the probability to win yields abnormal returns of more than 245 basis points over a three-month period. The findings reinforce theories suggesting that under-reaction to news is due to investors' limited processing ability which generates limited attention. In particular, some non-salient public information is totally ignored by investors.

Keywords: soccer clubs, stock price reaction, betting odds, game results

JEL Classification: G14, G12

Suggested Citation

Palomino, Frédéric and Zhang, Chendi and Renneboog, Luc, Information Salience and News Absorption by the Stock Market: The Peculiar Case of Betting Markets (December 2005). ECGI - Finance Working Paper No. 81/2005; CentER Discussion Paper No. 2005-62. Available at SSRN: https://ssrn.com/abstract=888739 or http://dx.doi.org/10.2139/ssrn.888739

Frédéric Palomino

EDHEC Business School - Department of Economics & Finance ( email )

France

Chendi Zhang (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
174
rank
169,086
Abstract Views
1,523
PlumX Metrics