HANDBOOK OF SPORTS AND LOTTERY MARKETS

Transcription

1 HANDBOOK OF SPORTS AND LOTTERY MARKETS Edited by Donald B. Hausch University of Wisconsin, Madison William T. Ziemba University of British Columbia Oxford University University of Reading F.I ASP,V I F,R AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO North-Holland is an imprint of Elsevier L< JJO*S

2 List of Contributors Preface Introduction to the Series xvi xix xxiii Part I Industry Studies 1 1 Pari-Mutuel Horse Race Wagering Competition from Within and Outside the Industry 3 Richard Thalheimer and Mukhtar M. AH 1. Introduction 4 2. Competition from Casino Gaming 5 3. Competition from State Lotteries 7 4. Competition from Professional Sports 8 5. Competition from Live Racing 8 6. Competition from Simulcast Wagering Summary and Conclusions 13 References 14 2 Modeling Money Bet on Horse Races in Hong Kong 17 John Bacon-Shone and Alan Woods 1. Introduction Variables examined Outcome Variables Independent Variables Results and Discussion Conclusion 21 References 22 Appendix: 31 Independent Variables Examined (Excluding Quadratic Terms) 23 vii

3 viii Contents Part II Utility, Probability, and Pace Estimation 25 3 Empirical Evidence on the Preferences of Racetrack Bettors 27 Bruno Jullien and Bernard Salanie 1. Introduction Some Stylized Facts Expected Utility Distortions of Probabilities Reference Points and Asymmetric Probability Weights Heterogeneous Preferences Exotic Bets Concluding Remarks 46 References 47 4 Approximating the Ordering Probabilities of Multi-Entry Competitions by a Simple Method 51 Victor S.Y.Lo and John Bacon-Shone 1. Introduction Theoretical Results of the Limiting Cases A Simple Approximation Empirical Analysis for the Approximated Henery Model Empirical Analysis for the Stern Model Conclusion 59 References 60 Appendix: Proof of Theorem Modeling Distance Preference and Pace Character in Thoroughbred Turf Racing 67 David Edelman 1. Background Case Study 1: Sha Tin (Hong Kong, SAR, PRC) Case Study 2: Randwick (Sydney, Australia) Qualitative Questions Do Distance Specialists Exist? Pace, Class, and Time: The Central Paradox of Racing Jockeys: Distance or Pace Preference? Discussion 80 References 80

4 ix Part III Favorite-Longshot Bias in the Win Market 81 6 The Favorite-Longshot Bias: An Overview of the Main Explanations 83 Marco Ottaviani and Peter Norman S0rensen 1. Introduction Notation Misestimation of Probabilities Market Power by Informed Bettors Preference for Risk Heterogeneous Beliefs Market Power by Uninformed Bookmaker Limited Arbitrage Simultaneous Betting by Insiders Timing of Bets Early Betting Late Betting 99 References Examining Explanations of a Market Anomaly: Preferences or Perceptions? 103 Erik Snowberg and Justin Wolfers 1. Introduction Preferences Expected Utility Models with Linear Probabilities Perceptions The Weighting of True Probabilities Perceptions Informational Effects Definition of Models and Implications for Combinatoric Bets Using Combinatoric Markets to Test the Models Testing Conditional Independence Relaxing Conditional Independence Further Conclusion ^ 129 References 130 Appendix A: Pricing of Combinatoric Bets Using Conditional Independence 134 Appendix B: Data Unifying the Favorite-Longshot Bias with Other Market Anomalies 137 Russell S. Sobel and Matt E. Ryan 1. Introduction Biases Found in the Previous Literature What Causes the Favorite-Longshot Bias at the Racetrack? The Casual Bettor 143

5 3.2. The Serious or Regular Bettor The Arbitrageur Is it Risk or Information? Can the Model Explain the Biases in Other Markets? Conclusion 157 References 158 The Favorite-Longshot Bias in S&P 500 and FTSE 100 Index Futures Options: The Return to Bets and the Cost of Insurance 161 Robert G. Tompkins, William T. Ziemba, and Stewart D. Hodges 1. Introduction Methodology Results Results for Quarterly Options on Stock Index Futures Results for Monthly Options on Stock Index Futures Conclusions 178 References 179 Part IV Weak Market Efficiency Efficiency of Racing, Sports, and Lottery Betting Markets 183 William T. Ziemba 1. Introduction Extent of Gambling in the U.S Racetrack Betting Markets Introduction to Racetrack Betting Win Market' Place and Show Markets Place and Show Probabilities Optimal Capital Growth Implementing the System and Empirical Results Does the System Still Provide Profits? Exotic Markets Cross-Track Betting The Football Betting Market The Basketball Betting Market Lotteries Introduction to Lotteries Inefficiencies with Unpopular Numbers 214 References 217

6 XI 11 Point Spread and Odds Betting: Baseball, Basketball, and American Football 223 Hal S. Stern 1. Introduction Efficiency of Odds Betting Markets Horse Race Betting Baseball Efficiency of Point Spread Betting Markets American Football Basketball Relationship of Point Spread and Odds Betting Normal Distribution Result Applications of the Normal Approximation The Normal Model and Mid-Event Wagering Summary 236 References Comparing Efficiency of the Over/Under-Bets on NFL and NBA Games 239 Joseph Golec and Maurry Tamarkin 1. Introduction The Sports Betting Market: Setting Point Spreads and Over/Unders NFL and NBA Betting Market Efficiency Conclusion 249 References Arbitrage and Risk Arbitrage in Team Jai Alai 253 Daniel Lane and William T. Ziemba 1. Introduction The Arbitrage Risk Arbitrages Final Remarks 269 References 271 PartV Semi-Strong Form Efficiency Semi-Strong Form Information Efficiency in Horse Race Betting Markets 275 M. Sung and J. E. V. Johnson 1. Introduction Semi-Strong Form Efficiency in Horse Race Betting Markets: Single Variable Models Arbitrage Between Parallel Markets Professional Predictions 285

7 xii Contents 2.3. Betting Volume Post Position Pedigree Distance Preference Single Variable Models: Overview Semi-Strong Form Efficiency in Horse Race Betting Markets: Multiple Variable Models Distribution-Based Methods Distribution-Free Methods Multiple Variable Models: Overview Semi-Strong Form Efficiency in Horse Race Betting Markets: Conclusion 301 References The Dosage Breeding Theory for Horse Racing Predictions 307 Marshall Gramm and William T. Ziemba 1. Introduction The Racetrack as a Sequence of Markets The Dosage Index and Performance Measures Data Acquisition Application of Breeding Information and Performance Measures to Refine Estimated Win Probabilities for the Kentucky Derby The Kelly Betting Model The Kentucky Derby, The Preakness Stakes, The Belmont Stakes, Conclusions 330 References 331 Appendix A: Data Sources 333 A.I Public's Wagering 333 A.2. Pedigrees 333 A.3. Chef-de-Race Listings 333 A.4. Experimental Free Handicap Listings 334 A.5. Results of the Kentucky Derby and Major Races Prior to the Kentucky Derby 334 Appendix B: Kentucky Derby, Preakness, and Belmont Winners, Efficiency in Horse Race Betting Markets: The Role of Professional Tipsters 341 Bruno Deschamps and Olivier Gergaud 1. Introduction The Model Data Tips and Rewards Rules 345

8 Xlll 3.2. Public Information Measuring Forecast Originality Results Results of Frequency Tests Originality and Accuracy Anti-Herding and Excess Originality Conclusion 351 References 351 Appendix: Proof of Equation (5) 353 Part VI Prediction Markets Index Betting for Sports and Stock Indices 357 John Haigh and Leighton Vaughan Williams 1. Background How Index Betting Operates Setting Spreads Spreads in Performance Indices Advantageous Bets Regulation, Taxation, and Biases in Spread Betting Markets 372 References 374 Appendix A 377 Appendix B 378 Appendix C Prediction Markets: From Politics to Business (and Back) 385 Erik Snowberg, Justin Wolfers, and Eric Zitzewitz 1. Overview The First Prediction Markets Markets in the Lab Current Uses of Prediction Markets: Business and Policy Future Directions: Decision Markets Potential Pitfalls Conclusion 400 References Betting Exchanges: A Technological Revolution in Sports Betting 403 Michael A. Smith and Leighton Vaughan Williams 1. Introduction The Operation of Betting Exchanges 404

9 XIV Contents 3. Empirical Models and Evidence Concerning Weak-Form Information Efficiency in Betting Exchanges New Evidence on the Degree of Bias in Betting Exchange Odds Conclusions 416 References 417 Part VII Soccer Soccer Betting in Britain 421 David Forrest 1. Introduction Development of Soccer Betting Transactions Costs in the Fixed Odds Market Early Study of Market Efficiency Tipsters Fundamental Analysis as an Aid to Soccer Betting Technical Analysis Sentiment The Future of Research on Soccer Betting 443 References Efficiency of Soccer Betting Odds Evidence from a Pan-European Electronic Market 447 Stephan Kossmeier and Simon Weinberger 1. Introduction The Soccer Betting Market Data Description Efficiency Tests Statistical Tests Economic Tests Conclusion 455 References 456 Part VIII Lotteries How to Design a Lottery 459 Ian Walker 1. Introduction The Odds of Winning a (Pari-Mutuel) Lottery The Expected Value Calculation 465

10 xv 4. Higher Moments of the Prize Distribution Econometric Methodology, Data, and Estimates Game Design Simulations Conclusion 476 References 477 Appendix: The Expected Value Formula The Statistics of Lotteries 481 John Haigh 1. Introduction Prize Structure and Winning Chances Tests of Randomness Gambler Choices 496 References U.S. Lotto Markets 503 Victor Matheson and Kent Grote 1. Introduction Differences Between American and European Lotteries Fungibility of Lottery Revenues Efficiency of Lottery Markets Parti Efficiency of Lottery Markets Part Efficiency of Lottery Markets Part Conclusions 522 References 523 Subject Index 525 Author Index 533