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Does sentiment harm market efficiency? An empirical analysis using a betting exchange setting


Merz, Oliver; Flepp, Raphael; Franck, Egon (2019). Does sentiment harm market efficiency? An empirical analysis using a betting exchange setting. UZH Business Working Paper Series 381, University of Zurich.

Abstract

This paper investigates whether the sentimental preferences of investors influence market efficiency. We use a betting exchange market environment to analyze the influence of sentimental bettors on market efficiency in 2,333 soccer matches played between 2006-2014 during the last three hours of the pre-play period. Contrary to bookmaker markets, there is no intermediary in a betting exchange and, thus, the market prices solely reflect the beliefs of person to person betting. We use three different proxy variables to measure the bettor sentiment and find that price changes are more likely to be inefficient for betting events that are more prone to sentiment. Based on that finding, we propose a trading strategy that generates positive returns before considering the transaction costs and commission fees. Although the returns turn negative after considering the transaction costs and commission fees, the proposed trading strategy still outperforms a random betting strategy.

Abstract

This paper investigates whether the sentimental preferences of investors influence market efficiency. We use a betting exchange market environment to analyze the influence of sentimental bettors on market efficiency in 2,333 soccer matches played between 2006-2014 during the last three hours of the pre-play period. Contrary to bookmaker markets, there is no intermediary in a betting exchange and, thus, the market prices solely reflect the beliefs of person to person betting. We use three different proxy variables to measure the bettor sentiment and find that price changes are more likely to be inefficient for betting events that are more prone to sentiment. Based on that finding, we propose a trading strategy that generates positive returns before considering the transaction costs and commission fees. Although the returns turn negative after considering the transaction costs and commission fees, the proposed trading strategy still outperforms a random betting strategy.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:30 August 2019
Deposited On:10 Sep 2019 15:19
Last Modified:04 Feb 2020 13:47
Series Name:UZH Business Working Paper Series
Number of Pages:28
ISSN:2296-0422
OA Status:Green
Other Identification Number:merlin-id:18174

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