An Application of Expert Information to Win Betting on the Kentucky Derby, 1981-2005

Roderick S. Bain, Donald B. Hausch and William T. Ziemba
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Roderick S. Bain: Ottawa, ON, Canada
Donald B. Hausch: School of Business, University of Wisconsin, Wisconsin, USA
William T. Ziemba: Sauder School of Business, University of British Columbia, Vancouver, Canada and Sloan School of Management, Massachusetts Institute of Technology, Massachusetts, USA

Chapter 24 in Calendar Anomalies and Arbitrage, 2012, pp 557-575 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe Kentucky Derby features top three-year-old thoroughbred horses. Run at 1¼ miles, it is typically at least 1/8 mile longer than any of the horses has raced before. This extra distance, usually combined with a large field, makes the race a difficult test of stamina for horses this young. Bettors, because there is no direct evidence of whether a horse has the stamina to compete effectively at 1¼ miles, are also challenged. The informational content of one publicly available, pedigree-based measure of stamina, the Dosage Index, is used with simple peiformance measures to identify a semi-strong-form inefficiency, and to create a betting scheme based on the optimal capital growth model that merges these criteria with the public’s opinion. Statistically significant profits, net of transaction costs, could have been achieved during the period 1981 to 2005.

Keywords: Calendar Anomalies; Arbitrage; Stock Prices; Stock Returns; US Stock Market; Futures Markets; Betting; Trading Strategies; Sports Market; Lottery Market; Capital Growth Theory; Semi-Strong Market Efficiency; Speculative Investments; Index Futures; Factor Models Based on Fundamental Anomalies; Worldwide Stock Market Strategies (search for similar items in EconPapers)
Date: 2012
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