The Role of Speculative Trade in Market Efficiency: Evidence from a Betting Exchange

Alasdair Brown and Fuyu Yang
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Alasdair Brown: University of East Anglia

No 68, University of East Anglia Applied and Financial Economics Working Paper Series from School of Economics, University of East Anglia, Norwich, UK.

Abstract: Does speculative trade reduce mispricing - and help create efficient markets - or drive prices further from fundamentals? We analyse betting exchange trading, on 9,562 U.K. horse races in 2013 and 2014, to find out. Crucially, as each race is run, the fundamental value of bets is unambiguously revealed. We find that the direction and volume of market order trade is predictive of fundamentals, suggesting that speculative trade is, on average, conducive to market efficiency. However, much of this effect is concentrated in the in-running period (during races) - when, even without trade, asset fundamentals would be revealed seconds later.

Date: 2014-12
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: The Role of Speculative Trade in Market Efficiency: Evidence from a Betting Exchange (2017)
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