PROFESSIONAL BETTORS, ODDS-ARBITRAGE COMPETITION, AND BETTING MARKET EQUILIBRIUM

Brian R. Adams, Frank W. Rusco and W. Walls
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Brian R. Adams: Advanced Digital Information Corporation, Redmond, WA, USA
Frank W. Rusco: U.S. General Accounting Office, Washington, D.C., USA

The Singapore Economic Review (SER), 2002, vol. 47, issue 01, 111-127

Abstract: A slew of empirical evidence on horse racetrack betting markets points to betting biases and market inefficiency. More recent empirical work has documented the absence of betting biases in racetrack betting markets characterized by a high volume of betting. This paper offers a competition-based model of betting behavior that is consistent with the pattern of betting biases reported in the literature. We postulate the existence of professional bettors who, being better informed and/or having different objectives than the general betting population, engage in odds arbitrage when doing so is profitable. We evaluate the case of a single odds-arbitraging bettor first in order to establish the fundamental properties of odds arbitrage. We then examine the effects of entry of professional bettors who play a Nash game in odds arbitrage; the results show that professionals' participation causes the final track odds to converge to the level implied by the horses' true win probabilities when there is a high volume of betting.

Keywords: Professional bettors; Odds arbitrage; Betting market equilibrium (search for similar items in EconPapers)
Date: 2002
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DOI: 10.1142/S021759080200033X

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