Year-end Sale % OFF 
Abstract
This paper studies efficient market hypothesis in prediction markets and the results are illustrated for the in-play football betting market using the quoted odds for the English Premier League. Our analysis is based on the martingale property, where the last quoted probability should be the best predictor of the outcome and all previous quotes should be statistically insignificant. We use regression analysis to test for the significance of the previous quotes in both the time setup and the spatial setup based on stopping times, when the quoted probabilities reach certain bounds. The main contribution of this paper is to show how a potentially different distributional opinion based on the violation of the market efficiency can be monetized by optimal trading, where the agent maximizes logarithmic utility function. In particular, the trader can realize a trading profit that corresponds to the likelihood ratio in the situation of one market maker and one market taker, or the Bayes factor in the situation of two or more market takers.
Highlights
The primary focus of this paper is to study whether a given probabilistic opinion is optimal in the sense that it cannot be statistically improved by an alternative probabilistic opinion
We show the relationship between profits from the optimal trading of an agent that maximizes logarithmic utility and the test statistics based on likelihood ratio and Bayes factor
We identify all possible pairs of time indices, where the previous quote probability is significant in the regression analysis on the training data and use the new prediction to test it in trading on the testing data
Summary
The primary focus of this paper is to study whether a given probabilistic opinion is optimal in the sense that it cannot be statistically improved by an alternative probabilistic opinion. The market prices represented by the quoted probabilities in the prediction markets are expected to already be the best, meaning that alternative views are not expected to generate long term profits This situation is known as market efficiency in the finance literature. We identify all possible pairs of time indices, where the previous quote probability is significant in the regression analysis on the training data and use the new prediction to test it in trading on the testing data. We apply these results to the training data set. The martingale tests provide two results; one is an indication of the possible violation of the efficient market hypothesis, the other being an alternative probabilistic opinion based on the regression analysis. The trading profits from this procedure correspond to Bayesian updating
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
