Pricing Decisions and Insider Trading in Horse Betting Markets

A. Schnytzer (), V. Makropoulou () and Martien Lamers

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper builds on a theoretical model by Schnytzer, Lamers, and Makropoulou (2010) that conceptualizes fixed odds horse betting markets as implicit call option markets. We model the decision making process of a bookmaker that sets his prices under uncertainty. We extend the paper of Schnytzer et al. (2010) by relaxing some assumptions and allowing for betting at multiple time periods. We show that when a bookmaker follows this pricing process built upon implicit options, the returns will exhibit a favorite-longshot bias. By performing Monte Carlo simulations we generate the option values and are able to measure the degree of insider trading, which we find to be around 60% in our dataset.

Keywords: Betting; Insider Trading; Contingent Pricing (search for similar items in EconPapers)
JEL-codes: D81 D82 G13 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2012-02
New Economics Papers: this item is included in nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:12/772

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