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An Examination of the Determinants of Biased Behaviour in a Market for State Contingent Claims
Author(s) -
BRUCE ALISTAIR C.,
JOHNSON JOHNNIE E. V.,
PEIRSON JOHN D.,
YU JIEJUN
Publication year - 2009
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2008.00741.x
Subject(s) - economics , favourite , differential (mechanical device) , econometrics , financial economics , political science , engineering , law , aerospace engineering
We develop a model to explain the differential incidence of the favourite–longshot bias in parallel sectors of the pari‐mutuel horserace betting market. Hypotheses are derived from the model and these are tested, using UK data, to explore the origins of the bias. Significant variations in the bias are discovered between market sectors on‐ and off‐racetrack. These results shed light on competing demand‐side explanations for the favourite–longshot bias and suggest that it is affected by a combination of behavioural and operational features of the markets and the types of bettors (informed and leisure) which they attract.