Does sentiment harm market efficiency? An empirical analysis using a betting exchange setting

Oliver Merz (), Raphael Flepp () and Egon Franck
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Oliver Merz: Department of Business Administration, University of Zurich
Raphael Flepp: Department of Business Administration, University of Zurich

No 381, Working Papers from University of Zurich, Department of Business Administration (IBW)

Abstract: This paper investigates whether the sentimental preferences of investors influence market efficiency. We use a betting exchange market environment to analyze the influence of sentimental bettors on market efficiency in 2,333 soccer matches played between 2006-2014 during the last three hours of the pre-play period. Contrary to bookmaker markets, there is no intermediary in a betting exchange and, thus, the market prices solely reflect the beliefs of person to person betting. We use three different proxy variables to measure the bettor sentiment and find that price changes are more likely to be inefficient for betting events that are more prone to sentiment. Based on that finding, we propose a trading strategy that generates positive returns before considering the transaction costs and commission fees. Although the returns turn negative after considering the transaction costs and commission fees, the proposed trading strategy still outperforms a random betting strategy.

Keywords: Sentiment bias; Market efficiency; Forecasting; Betting markets; Soccer (search for similar items in EconPapers)
JEL-codes: D40 G40 L83 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2019-08
New Economics Papers: this item is included in nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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