Price Biases in a Prediction Market: NFL Contracts on Tradesports

Richard Borghesi

Journal of Prediction Markets, 2007, vol. 1, issue 3, 233-253

Abstract: We examine deviations between the prices and values of binary options listed on Tradesports.com, an online prediction market. Our analysis shows that NFL sides contracts are overpriced on average, indicating that this market may be characterized by a shortage of sellers. We also find that overpricing is more pronounced immediately after information shocks occur, especially when the news is negative. Additionally, while prior research suggests that differences between asset prices and values should be symmetric around the market-price-midpoint of $50, we find that this divergence is instead larger for low-priced contracts. Finally, we demonstrate that a simple rule designed to exploit the identified biases enables a highly profitable trading strategy.

Date: 2007
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