An alternative in deriving subjective probabilities in the futures wagering market

Abstract

AbstractImplied subjective probabilities from futures wagering markets are typically determined using a system known as “fair odds.” Here, an alternative system of calculating subjective probabilities—“quasi‐parimutuel”—is offered. Instead of considering individual lines independent of the remainder of the wagering opportunities, the quasi‐parimutuel method considers the ratios of wagers required between lines such that a constant return is generated for every line. As a result, relative to the fair odds system, favorites (underdogs) have higher (lower) subjective probabilities, and expected returns across all wagers vary.