Working Paper: CEPR ID: DP1623
Authors: John Fingleton; Patrick Waldron
Abstract: This paper develops a theoretical model of how bookmakers? odds are determined, given varying levels of inside information on the part of punters. Bookmakers? attitudes towards risk and the degree of competition between them will influence bookmaker behaviour. Using a data set of 1696 races in Ireland in 1993, we find that bookmakers are extremely risk-averse, and estimate that operating costs and monopoly rents combined account for up to 4% of turnover and that between 3.1% and 3.7% of betting is by punters with inside information.
Keywords: inside information; betting odds; asset pricing
JEL Codes: D82; G13; L83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bookmakers' risk aversion (D81) | odds set by bookmakers (L83) |
| operating costs (D23) | odds set by bookmakers (L83) |
| inside information (D82) | odds set by bookmakers (L83) |
| bookmakers' risk aversion (D81) | favorite-longshot bias (G41) |
| bookmakers' risk aversion (D81) | relationship between margins and number of runners (C34) |
| greater risk aversion among Irish bookmakers (L83) | higher margins in Irish market (D43) |
| anti-competitive behavior (L41) | higher margins in Irish market (D43) |
| informed trading (G14) | odds set by bookmakers (L83) |