Optimal Betting Odds Against Insider Traders

“parimutuel horse-race betting (Ali, 1977; Golec and Tamarkin, 1998; Jullien and Salanie, 2000; Shin, 1991, 1992, 1993; Thaler and Ziemba, 1988; Vaughan Williams and Paton, 1997).”

“Alternatively longshot bias may be a consequence of insiders trading on the basis of private information (Shin, 1991, 1992, 1993; Vaughan Williams and Paton, 1997), or informed traders intervening to exploit profitable betting opportunities created by the actions of uninformed, pleasure bettors…”

“Notably, Shin (1991 and 1992) considers asset pricing by an uninformed monopolist bookmaker in a market in which some traders take positions on the basis of their beliefs while others are perfectly informed about the outcome.”

“Market power by uninformed bookmakers (Section 7): For fixed odds betting markets , Shin (1991 and 1992) explained the favorite-longshot bias as the response of an uninformed bookmaker to the private information possessed by insiders.”

“In accordance with Shin (1992) and Vaughan Williams and Paton (1997), using higher values of k has very little impact on our results.”

“Shin (1991, 1992, 1993) proposed a model based on the assumption that bookmakers quote odds which maximize their expected profit in the presence of uninformed bettors and a known proportion of insider traders.”

“7 Other information models for racetrack betting have been derived by Williams and Paton (1998), Shin (1991), and Terrell and Farmer (1996).”

“degree of insider trading in horse racing are similar to the average estimates reported by Shin (1993). It is interesting that the average degree of insider trading is estimated to be lower in greyhound and horse racing than in the other sports (except baseball) even though they have the highest individual estimates.”

“This phenomenon is not only observed in football but also in many different markets [1,31,38,33,35,34,41,39,18,23,6].”

“Unlike Shin (1991, 1992), however, Levitt suggested biased pointspreads in the NFL betting market reflect a sportsbook’s confidence that its forecasts are superior to those implied by the betting aggregate.”

“0 10 20 30 40 Trading time [days] Assets [9-11] + [12+]”

“1 Notation similar to Cortis (2015) and Shin(1991) is used.”

“Shin (1991, 1992, 1993) pointed out that bookmakers tend to hedge against potential insiders with superior knowledge by increasing the prices (relative to true probabilities) where the risk is high, namely bets with high odds (longshot odds).”

“…and empirical studies of the bias have suggested supply-side explanations, stressing the behavioural characteristics of market makers (e.g. Shin 1991, 1992, 1993), or structural characteristics of the markets themselves, notably Hurley and McDonough (1995), Vaughan Williams and Paton…”

“Shin (1991) considered the case of a bookmaker who faces a heterogeneous population of bettors.”

“…Literature: Our theoretical model is related to existing models linking belief heterogeneity to the FLB, notably the competitive model of Ali (1977) and the asymmetric information approach of Ottaviani and Sorensen (2006, 2010), but also the work of Shin (1991, 1992) and Potters and Wit (1996).”

“Shin (1991, 1992, 1993) points out that bookmakers skew the odds because they are facing an adverse selection problem in which some bettors may be trading on the basis of superior information.”

“In a series of papers, Shin (1991, 1992, 1993) showed that in a bookmakers’ market, the presence of insider traders generates the favorite-longshot bias is highly significant. as bookmakers set odds so as to protect themselves against such wellinformed bettors.”

“We adapt the horse race betting models due to Shin (1991; 1992) to analyze match-fixing in team or individual sporting contests.”

“SN Shin (1991, 1992, 1993) proposed a model based on the assumption that bookmakers quote odds which maximize their expected profit in the presence of uninformed bettors and a known proportion of insider traders.”

“Although there is a notable body of theoretical and empirical work on how bookmakers address potential insider trading (Shin, 1991, 1992, 1993; Cain et al., 2003), this paper is, to the best of our knowledge, the first to use bookmaker data to address the prevalence and persistence of anchoring.”

“In the horseracing context, this amounts to seeing whether financial advantage may be gained by using the Markets Odds alone to forecast racing outcomes, with much of the literature falling into the category of either Odds calibration studies such as ‘Favourite-Longshot bias’ studies [Hausch et al. (1994)], or ‘Inside…”

“…with a fixed entry fee (Levitt, 2004). maker pricing is that bettor sentiment is often correlated with other confounders such as bettor risk or skewness preferences (Golec & Tamarkin, 1998; Quandt, 1986) and bookmaker price adjustments due to the risk of the underlying event (Shin, 1991).”

“Shin (1991, 1992) shows that the presence of insider traders generates a favourite-longshot bias in fixed odds markets.”

“…them into probabilities by using the two procedures proposed in the literature: the ‘basic normalisation’—dividing the inverse odds by the booksum, that is, the sum of the inverse betting odds, as broadly explained in Štrumbelj (2014)—and ‘Shin’s procedure’ described in Shin (1991, 1993).”

“Shin (1991, 1992) also suggests that bookmakers (in horse racing) may set prices that differ from unbiased forecasts.”

“The Economic Journal © 2013 Royal Economic Society. in markets where bettors have a counterparty (including bookmaker markets and betting exchanges but excluding pari-mutuel markets) is adverse selection (Shin, 1991, 1992, 1993).”

“An important explanation of the bias is that of Shin (1991, 1992, 1993) and Hurley and McDonough (1995).”

“They therefore shorten longhots’ odds even more (Shin, 1991 , 1992 , 1993 ).”

“Comparison with the models by Shin and Snowberg and Wolfers In Section 4.2 we showed that the RMB model outperforms the PMB in all the three data sets we use, generating smaller MSE and suggesting more plausible market compositions. In this section, we compare it with the models developed by Shin (1993) and Snowberg a…”

“An alternative explanation for varying margins is centred on the incidence of insider trading activity (Shin 1991, 1992).”

“, where, on average, the odds offered are such that the rate of return to betting on favorites is better than on longshots [in relation to bookmaker markets, see, for example, Dowie 1976; Crafts 1985; Shin 1991; Cain, Law, and Peel 2003]).”

“Recent work has embraced a consideration of insider eŒects (Shin, 1991, 1992, 1993; Schnytzer and Shilony, 1995; Vaughan-Williams and Paton, 1997a), information costs (Terrell and Farmer, 1996) or perceptions of ine ciency (Vaughan Williams and Paton, 1997b; Bruce and Johnson, 2000) on e ciency.”

“The insider betting model of Shin (1991), from which we adapt the basic setup, is similar to insider trading (Glosten and Milgrom, 1985; Kyle, 1985; Seyhun, 1992), where some agents use privileged information which might have been randomly or costlessly acquired.”

“Finally, the Shin measure of market efficiency is applied to the study's 994-race sample. Shin (1993) demonstrates that in equilibrium, the sum of price probabilities (odds) offered by bookmakers will exceed 1, such that”

“Shin (1991, 1992) studies this bias in European horse betting markets, while Economica © 2012 The London School of Economics and Political Science Hurley and McDonough (1995) examine North American parimutuel betting, in which odds automatically adjust based on the amount bet on each outcome.”

“Therefore, in Section III, we introduce two measurements to calculate the winning probability based on FIFA rating [17].”

“Exceptions include Sidney 1976 , whose work is more concerned with computaŽ .tional details than with logic, and Shin 1991, 1992, and 1993 , whose game-theoretic model attributes the well-known favourite-longshot bias to the attempts of bookmakers to cope with punters who may have inside…”

“A number of studies have examined the sources of information asymmetry in betting markets and used their findings to explain the phenomenon of the Favourite Longshot Bias, which is possibly the most widely studied of betting market biases (Shin, 1991; 1992; 1993; Cain, Law & Peel, 2003).”

“In particular, we take the closing line betting odds associated with each match from different online bookmakers, and transform them into outcome probabilities using the method developed by Shin (1991, 1993) but using the procedure of Jullien and Sala-nié (1994).”

“The above demand is a straightforward extension of the traditional Hotelling (1929) and Salop (1979) models in which consumers face unit demand.”

“…is: 1 ( ) ( ) (1 ) n j j j j E W E P T w (1) or, equivalently, using assumption (c): 6 If the bookmaker were a monopolist and demand was totally inelastic, maximizing profits would lead to unbounded prices 7 Shin (1991, 1992) makes the assumption of ex ante competition among bookmakers.”

“This pattern is the classic favourite–longshot bias [28, 59, 61, 66] documented at unprecedented scale: at long horizons, favourites are systematically underpriced and longshots are overpriced.”

“3 Shin (1991) proposed an alternative approach to correct for the bookmaker margin taking insider trading into account.”

“It has been shown in the literature (Shin, 1991) that if the betting market is a monopoly, ri > pi will always hold for all i; but if it is competitive and there is a threat of match-fixing, then setting ri < pi for some (but not all) i can be optimal for bookmakers (Bag & Saha, 2011).”

“Shin (1991, 1992, 1993) studies the market for bets in a British horse race to better understand the pricing of state contingent claims with asymmetric information.”

“This approach, sometimes known as the Shin model, was developed by Hyun Song Shin in the early 1990s (Shin 1991, Shin 1992, Shin 1993).”

“Second, we use the approach proposed by Shin (1991, 1992, 1993) and implemented by Jullien and Salanié (1994).”