Information and Price Efficiency in Betting Markets

This doctoral thesis consists of four chapters which investigate how information efficiency operates in betting markets. In the first chapter, I shed light on the functioning of markets with insider traders by comparing the efficiency of betting markets with a high proportion of insider activity with analogous markets. Previous studies in the literature have established the need to separate insider from expert trading. However, this type of separation proves difficult to achieve because experts and insiders co-exist in most market settings. Utilising novel betting markets in which expert skill bettors are unable to use their expert knowledge, the new methodology outlined in this chapter uncouples insider from expert betting, thus allowing more direct measurement of insider trading than in previous empirical tests. Evidence is presented in favour of the main theoretical predictions from the highly cited Shin model of insider trading. Price setters are found to charge an extra premium in markets with high proportions of insiders when compared to equivalent markets. The insiders accurately predict event outcomes, and their presence exacerbates a well known bias in betting market prices whereby returns on betting favourites is higher than for bets on longshots. The support of home spectators is one of the contributing factors to the home advantage effect in sports matches. The COVID-19 pandemic led to European soccer matches being played without spectators. Chapter two and three evaluate the efficiency of betting market pricing for top league European soccer matches played behind closed doors during the pandemic. In chapter two, the ability of the market to predict match outcomes under the new circumstance is tested empirically. The evidence points towards improvement in both market predictions for which team wins, as well as the realised goal difference between the two teams. While chapter two assesses the predictive accuracy of betting market pricing during the lockdown compared to previous time periods, it does not consider the adaption process of the bookmakers. In chapter three, evidence is presented highlighting how betting markets adjusted promptly to account for a reduced home advantage. These swift adjustments proved accurate over a large sample of soccer matches subsequently played without spectators even though the earliest games appeared to suggest a much bigger change in home advantage. In contrast to a number of contemporaneous studies on the topic suggesting inefficiencies in market pricing, the overall empirical evidence presented here suggests that betting markets reacted relatively efficiently in processing the new information even in a situation where there was considerable uncertainty. The final chapter compares the properties of betting market odds set in two distinct markets for a large sample of European soccer matches. As found in previous studies, the traditional market for bets on a home win, an away win or a draw exhibit some inefficiencies, in particular there is a strong pattern of favourite-longshot bias. Conversely, betting market odds from a large growing market that has emerged in recent years, the Asian handicap market, generate efficient forecasts for the same set of matches using a new methodology for mapping Asian handicap betting odds into probabilities.