Sports Arbitrage: Two-Agency, Two-Outcome Efficient Pricing Test
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This Demonstration shows the opportunity that may be created if betting agencies do not agree on the odds of a match with two teams and no possibility for a draw. The graphs represent the payoffs of possible weighted portfolios of the two outcomes. The axis represents the proportion of any bet in the portfolio on team A winning. If , then the agent (bet placer) believes team B will win the game. If odds at the agency where the bet was placed are that team B will win, the bet placer will receive the payoff from the agency minus their initial investment, making their return if B does win. If B does not win, they will lose their initial investment (). Let and be the payoff from A winning and the payoff from B winning, respectively. The profit functions for a weighted portfolio of outcomes are therefore:
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Contributed by: Tom Stannard (May 2015)
Open content licensed under CC BY-NC-SA
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References
[1] E. Franck, E. Verbeek, and S. Nüesch, "Inter-market Arbitrage in Betting," Economica, 80(318), 2013 pp. 300–325. doi:10.1111/ecca.12009.
[2] B. R. Marshall, "How Quickly Is Temporary Market Inefficiency Removed?," The Quarterly Review of Economics and Finance, 49(3), 2009 pp. 917–930. doi:10.1016/j.qref.2009.04.006.
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