The Hong Kong Betting Market: A Model of Pricing Efficiency

Abstract

Racetrack betting markets have historically been a great testing ground for the efficient market hypothesis and experiments in behavioral economics. This is largely due to the fact that these markets share a number of similarities with financial equity markets but also possess the important property of having a welldefined termination point for all assets (betting contracts) traded on these exchanges. This thesis studies the degree to which horse betting markets in Hong Kong are efficient and attempts to underscore the non‐existence of a favorite‐longshot bias in the Win Markets and the existence of a reverse favorite‐longshot bias in the Place Markets. These forms of bias are important indicators of pricing efficiency in betting markets. This paper also analyzes the correlation that market volume has with market efficiency and the variability of odds. This study will analyze current trends that hold within the Hong Kong betting markets by replicating econometric methods used in past studies on the efficiency of racetrack betting markets.