Abstract
We study the behaviour of the Betfair betting market and the sterling/dollar exchange rate (futures price) during 24 June 2016, the night of the EU referendum. We investigate how the two markets responded to the announcement of the voting results. We employ a Bayesian updating methodology to update prior opinion about the likelihood of the final outcome of the vote. We then relate the voting model to the real time evolution of the market determined prices. We find that although both markets appear to be inefficient in absorbing the new information contained in vote outcomes, the betting market is apparently less inefficient than the FX market. The different rates of convergence to fundamental value between the two markets leads to highly profitable arbitrage opportunities.
Highlights
Were currency and prediction markets efficient overnight on 24 June 2016 as the results of the United Kingdom European Union membership referendum were announced?This question is important as the EU referendum was one of the great political shocks of 2016
The other, on an unrelated subject, was the Alternative Vote Referendum in 2011 and had a turnout of only 42.2%, opposed to a typical figure of 60 − 70% for general elections did not hold in the currency market during the night of the referendum, but we demonstrate this was the case for the prediction market
We summarize the debate concerning the Efficient Market Hypothesis (EMH) and refer to two studies of referendums recently held in the UK
Summary
Were currency and prediction markets efficient overnight on 24 June 2016 as the results of the United Kingdom European Union membership referendum were announced?This question is important as the EU referendum was one of the great political shocks of 2016. Were currency and prediction markets efficient overnight on 24 June 2016 as the results of the United Kingdom European Union membership referendum were announced? There was a strong prior belief that the UK would vote to remain in the European Union. This provided fertile ground for inefficiencies and behavioural biases to arise. There were 382 different voting areas and results were announced and widely distributed at different times This represented a drip feeding of information to the market for a period of a few hours. There are 2 markets to study, a prediction market in the Betfair betting market and the pound dollar currency market
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