Herding in Imperfect Betting Markets with Inside Traders

Authors

  • Adi Schnytzer Departments of Economics, Bar Ilan University
  • Avichai Snir Department of Economics Bar-Ilan University

DOI:

https://doi.org/10.5750/jgbe.v2i2.528

Abstract

Herding is often considered as a phenomenon that drives prices of risky assets away from their equilibrium levels. In this paper we study the on-course UK and Australian horse betting markets. These are simple examples of imperfect markets for state-contingent assets. We provide strong evidence of herding behavior and show that the effects of herding are occasionally sufficient to render the markets inefficient even in the weak sense. Furthermore, the results demonstrate that traders with inside information are not always able to arbitrage away the effects of herding.

References

Abbel, Andrew B. (1990), "Asset Prices under Habit Formation and Catching Up with the Jonases," American Economic Review 80,2: 38–42.

Banerjee, Ahijit V. (1992), "A Simple Model of Herd Behavior," Quarterly Journal of Economics, 107,3: 797-817.

Banerjee, Ahijit V. (1993), "The Economics of Rumors," Review of Economic Studies 60,2: 309–327.

Bruce, Alisair C. and Johnnie E.V. Johnson (2005), "Market Ecology and Decision Behavior in State-Contingent Claims Markets," Journal of Economic Behavior and Organization 56: 199-217.

Busche, Kelly and Christopher Hall (1988), "An Exception to the Risk Preference Anomaly," Journal of Business 61: 337-346.

Carlton, D.W. and J. M. Perloff (1994), Modern Industrial Organization, 3rd edition, (New York, NY: Harper-Collins-College-Publishers).

Coleman, Les (2006), "Just How Serious is Insider Trading? An Evaluation using Thouroubred Wagering Markets," working paper.

Crafts N.F.R (1985), "Some Evidence of Insider Knowledge in Horse Race Betting in Britain," Economica 52,207: 295-304.

Dowie, Jack (1976), "On the Efficiency and Equity of Betting Markets," Economica 43,170: 139-150.

Fama, E. F. (1970), "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance 53, 383–498.

Figlewski, Stephen (1979), "Subjective Information and Market Efficiency in a Betting Market," Journal of Political Economy 87,1: 75-88.

Gabriel, Paul E. and Marsden James R. (1990), "An Examination of Market Efficiency in British Racetrack Betting," Journal of Political Economy 98,4: 874-885.

Gandar, John, M., Richard A. Zuber and R. Stafford Johnson (2001), "Searching for the Favourite-Longshot Bias Down Under: An Examination of the New-Zealand Pari-Mutuel Betting Market," Applied Economics 33: 1621-1629.

Hirshleifer, David A., Avanidhar Subrahmanyam and Sheridan Titman (1994), "Security Analysis and Trading Patterns When Some Investors Receive Information Before Others," Journal of Finance 49: 1665–1698.

Hurley, William and Lawrence McDonough (1995), "A Note on the Hayek Hypothesis and the Favorite Long Shot Bias in Parimutuel Betting," American Economic Review 85,4: 949-955.

Johnson, Johnnie E.V. and M. Sung (2006), "Revealing Weak Form Inefficiency in a Market for State Contingent Claims," Working Paper.

Law, David and David A. Peel (2002), "Insider Trading, Herding Behavior and Market Plungers in the British Horse-race Betting Market," Economic Journal 69, 327 – 338.

Levitt, Steven D. (2004), "Why are Gambling Markets Organized so Differently from Financial Markets?" Economic Journal 114: 223-246.

Sauer, Raymond D. (1998), "The Economics of Wagering Markets," Journal of Economic Literature 36,4: 2021-2064.

Schnytzer, Adi and Yuval Shilony (1995) ,"Inside Information in a Betting Market," Economic Journal 105: 963-971.

Schnytzer, Adi and Yuval Shilony (2005), "Insider-Trading and Bias in a Market for State-Contingent Claims," in L. Vaughn Williams (ed.) Information Efficiency in Financial and Betting Markets, Cambridge University Press, 287-312.

Schnytzer, Adi and Avichai Snir (2006), "SP Betting as a Self-Enforcing Implicit Cartel," Journal of Gambling Business and Economics, forthcoming.

Shiller, Robert J. (1990), "Market Volatility and Investor Behavior," American Economic Review 80,2: 58–62.

Shiller, Robert J. (1995), "Conversation, Information and Herd Behavior," American Economic Review 85,2: 181-185.

Shiller, Robert J. (2003), "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives 17,1: 83–104.

Shin, Hyun Song (1993), "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal 103,420: 1141-1153.

Shin, Hyun Song (1992), "Prices of State Contingent Claims with Insider Traders and Favorite-Longshot Bias," Economic Journal 102,411: 426-435.

Shin, Hyun Song (1991), "Optimal Betting Odds against Insider Traders," Economic Journal 101,408: 1179-1185.

Shing, Hui Fai (2006), "The Economics of Betting Markets," Unpublished Ph.D. thesis, University of London.

Thaler, Richard H. and Williams T. Ziemba (1988), "Anomalies: Parimutuel Betting Markets: Racetrack and Lotteries," Journal of Economic Perspective 2,2:161-174.

Tirole, Jean (1982), "On the Possibility of Speculation under Rational Expectations," Econometrica 50,5: 1163–1182.

Van Norden, Simon (1996), "Regime Switching as a Test for Exchange Rate Bubbles," Journal of Applied Economics 11,3: 219–251.

Vaughan Williams, Leighton and David Paton (1997), "Why is there a Favourite-Longshot Bias in British Racetrack Betting Markets?" Economic Journal 107,440: 150-158.

Published

2013-01-02

Issue

Section

Articles