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Exploring Decision Makers’ Use of Price Information in a Speculative Market

Center for Risk Research, School of Management, University of Southampton, Highfield, Southampton SO17 1BJ, United Kingdom
Department of Mathematics and Statistics, University of Melbourne, Parkville, Melbourne, Victoria 3010, Australia
Center for Risk Research, School of Management, University of Southampton, Highfield, Southampton SO17 1BJ, United Kingdom
jej{at}soton.ac.uk
odjones{at}ms.unimelb.edu.au
ltang{at}soton.ac.uk

We explore the extent to which the decisions of participants in a speculative market effectively account for information contained in prices and price movements. The horse race betting market is an ideal environment to explore these issues. A conditional logit model is constructed to determine winning probabilities based on bookmakers’ closing prices and the time-indexed movement of prices to the market close. We incorporate a technique for extracting predictors from price (odds) curves using orthogonal polynomials. The results indicate that closing prices do not fully incorporate market price information, particularly information that is less readily discernable by market participants.

Key Words: market efficiency; information; modeling price curves; betting; wagering
History: Received: July 29, 2003;