Informational efficiency and behaviour within in-play prediction markets



Angelini G, De Angelis L & Singleton C (2022) Informational efficiency and behaviour within in-play prediction markets. International Journal of Forecasting, 38 (1), pp. 282-299.

Studies of financial market informational efficiency have proven burdensome in practice, because it is difficult to pinpoint when news breaks and is known by some or all the participants. We overcome this by designing a framework to detect mispricing, test informational efficiency and evaluate the behavioural biases within high-frequency prediction markets. We demonstrate this using betting exchange data for association football, exploiting the moment when the first goal is scored in a match as major news that breaks cleanly. There are pre-match and in-play mispricing and inefficiency in these markets, explained by reverse favourite-longshot bias (favourite bias). The mispricing tends to increase when the major news is a surprise, such as a goal scored by a longshot team late in a match, with the market underestimating their chances of going on to win These results suggest that, even in prediction markets with large crowds of participants trading state-contingent claims, significant informational inefficiency and behavioural biases can be reflected in prices.

Market efficiency; Favourite-longshot bias; Mispricing; Behavioural bias; Betting strategy

International Journal of Forecasting: Volume 38, Issue 1

Publication date31/01/2022
Publication date online31/07/2021
Date accepted by journal01/05/2021
PublisherElsevier BV

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Dr Carl Singleton

Dr Carl Singleton

Senior Lecturer in Economics, Economics