Price formation in parimutuel markets

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dc.contributor.advisor Schumacher, C en Geertsema, Paul en 2017-06-29T05:24:21Z en 2010 en 2010-12-16 en
dc.identifier.citation Sub type: Master's Thesis. Supervisors: Schumacher C. Massey University, 2010 en
dc.identifier.uri en
dc.description.abstract Two types of betting are common in sports betting: fixed odds betting and parimutuel betting. In fixed odds betting, the payout conditional on winning is fixed once the bet is placed and is not affected by the placing of subsequent bets. By contrast, winning bettors in a parimutuel contest share pro-rata in the total betting pool. This means that the payout to winning bettors in a parimutuel contest depends not only on selecting the winning outcome, but also on the amounts bet by other bettors (which cannot be observed at the time a bet is placed). Therefore a parimutuel contest can be viewed as a game at the level of individual bettors. Existing models in the parimutuel literature explain the data by either assuming a single, representative bettor with certain risk preferences or by assuming that a number of risk neutral bettors compete strategically within a game theoretic framework. Our contribution is to construct a novel theoretical framework of parimutuel markets in which we model both strategic interaction and risk preferences at the level of individual insiders, in the presence of exogenous outsiders. We solve this model analytically for the optimal insider betting amount in a static symmetric Nash equilibrium. Using a new dataset of 1.6 million individual horse race bets in New Zealand from 2006 to 2009, we document a strong inverse linear relationship between our model-implied insider risk preferences and the strength of insider beliefs relative to outsiders. That is, as the strength of insiders’ beliefs relative to that of outsiders decrease, implied risk sensitivity moves from risk averse to risk loving. At a level of insider beliefs congruent with actual performance in the data, average implied risk preferences are close to zero, that is, insiders are effectively risk neutral. While risk neutrality is a standard assumption in strategic interaction models of parimutuel betting, our study is the first to provide empirical support for this assumption. Finally, we document a strong relationship (not previously reported in the literature) between the average bet size and the average payout ratio, suggesting that bettors with inside information self-select by placing larger bets. en
dc.publisher Massey Research Online en
dc.relation.ispartof Masters Thesis - University of Auckland en
dc.rights Items in ResearchSpace are protected by copyright, with all rights reserved, unless otherwise indicated. Previously published items are made available in accordance with the copyright policy of the publisher. en
dc.rights.uri en
dc.title Price formation in parimutuel markets en
dc.type Thesis en Management (Economics) en Massey University en Masters en
dc.rights.holder Copyright: The author en en
dc.rights.accessrights en
pubs.elements-id 617328 en Business and Economics en Accounting and Finance en
pubs.record-created-at-source-date 2017-03-17 en

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