Comparing Two Methods for Testing the Efficiency of Sports Betting Markets

Hegarty, Tadgh and Whelan, Karl (2024): Comparing Two Methods for Testing the Efficiency of Sports Betting Markets.

Abstract

Sports betting markets can be considered strongly efficient if expected returns on all possible bets on an event are equal. If this form of efficiency holds, then there is a direct mapping from betting odds into probabilities of outcomes of sporting events. We compare two regression-based methods for testing this form of efficiency that have been used in previous research: One that uses normalized probabilities as the explanatory variable for event outcomes and one that uses the inverse of the decimal odds. We show that the normalized probability method produces good tests of the null hypothesis of strong market efficiency but that the inverse odds method does not, with results biased against finding favorite-longshot bias. We illustrate this finding using large datasets of bets and outcomes for tennis and soccer and also with realistic simulations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Betting Markets, Market Efficiency, Favorite-Longshot Bias
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; L - Industrial Organization > L8 - Industry Studies: Services > L83 - Sports ; Gambling ; Restaurants ; Recreation ; Tourism

References

Angelini, G.\, and L.\ De Angelis (2019). ``Efficiency of online football betting markets,'' \textit{International Journal of Forecasting}, 35, 712–721.

Davies, R. (2022a). \textit{Jackpot}, Faber.

Davies, R. (2022b). Revealed: how bookies clamp down on successful gamblers and exploit the rest, The Guardian. www.theguardian.com/society/2022/feb/19/stake-factoring-how-bookies-clamp-down-on-successful-gamblers

Elaad, G.\, J.\ J.\ Reade and C.\ Singleton (2020). ``Information, prices and efficiency in an online betting market,'' \textit{Finance Research Letters}, Article 101291.

Fama, G. (1970). ``Efficient capital markets: A review of theory and empirical work," \textit{Journal of Finance}, Volume 25, pages 383-417.

Forrest, D.\ and R.\ Simmons (2002). ``Outcome uncertainty and attendance demand in sport the case of English soccer,'' \textit{Journal of the Royal Statistical Society. Series D (The Statistician)}, Vol. 51, pages 229-241.

Forrest, D.\ and R.\ Simmons (2005). Efficiency of the odds on English professional football matches. in Williams, L. V., editor, \textit{Information Efficiency in Betting Markets}, Cambridge University Press.

Forrest, D.\ and R.\ Simmons (2008). ``Sentiment in the betting market on Spanish football,'' \textit{Applied Economics}, 40, 119-126.

Hegarty, T.\ and K.\ Whelan (2023). Forecasting soccer matches with betting odds: A tale of two markets. CEPR discussion paper No.\ 17949.

Lyócsaa, S.\ and I.\ Fedorko (2014). ``What drives intermediation costs? A case of tennis betting market,'' \textit{Applied Economics}, Volume 48, pages 2037–2053.

Mincer, J and A. Zarnowitz (1969). ``The evaluation of economic forecasts.'' in \textit{Economic Forecasts and Expectations: Analysis of Forecasting Behavior and Performance.} New York: National Bureau of Economic Research.

Paul, R.\, A.\ Weinbach, R.\ Borghesi and M. Wilson (2009). ``Using betting market odds to measure the uncertainty of outcome in Major League Baseball,'' \textit{International Journal of Sport Finance}. Volume 4, pages 255-263.

Pope, P.\ and D.\ Peel (1989). ``Information, prices and efficiency in a fixed-odds betting market,'' \textit{Economica}, 56, 223-241.

Štrumbelj, E.\ and M. Šikonja (2010). ``Online bookmakers’ odds as forecasts: The case of European soccer leagues''. \textit{International Journal of Forecasting}, 26, 482-488.

Thaler, R.\ and W.\ Ziemba (1988). ``Anomalies: Parimutuel betting markets: racetracks and lotteries,'' \textit{Journal of Economic Perspectives}, 2, 161-174.

Winekelmann, D., M. Ötting, C. Deutscher and T. Makarawicz (2023). ``Are betting markets inefficient? Evidence from simulations and real data,'' \textit{Journal of Sports Economics}, forthcoming.