Pricing Exotic Racetrack Wagers

Donald B. Hausch, Victor S. Y. Lo and William T. Ziemba
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Donald B. Hausch: School of Business, University of Wisconsin, Madison, Wisconsin 53706, USA
Victor S. Y. Lo: Management Science Division, Faculty of Commerce, University of British Columbia, Vancouver BC, Canada V6T 1Z2, Canada
William T. Ziemba: Management Science Division, Faculty of Commerce, University of British Columbia, Vancouver BC, Canada V6T 1Z2, Canada

Chapter 47 in Efficiency of Racetrack Betting Markets, 2008, pp 469-483 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractNumerous authors have found that the win market at racetracks is essentially weak-form efficient. The relative amounts wagered at various odds levels provides a fairly accurate estimate of the true chances of winning. However, the accuracy of this estimate can be improved by adjusting for the favorite-longshot bias. This is the tendency for bettors to significantly overvalue low probability high payoff wagers on longshots and significantly undervalue high probability low payoff favorites. The resulting pricing equation coupled with a probability model for running time distributions generates accurate probabilities of all possible finishes. This allows us to price exotic wagers such as the exactor, triactor, quinella and daily double, and to identify when such bets have a positive expected return.

Keywords: Racetrack Efficiency; Racetrack Betting Market; Racetrack Betting; Win Market; Finance (search for similar items in EconPapers)
Date: 2008
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