How Efficient Are Information Markets? Evidence from an Online Exchange

Abstract

Do observed inefficiencies in betting markets generalize to real financial markets? Evidence from an online exchange with characteristics of both types of markets suggests they do not. This study replicates some known anomalies in sports wagering markets on the online exchange, such as overreaction to news. The observed inefficiencies do not generalize to other wagering markets, such as financial markets, even though both markets have similar liquidity, volume and contractual structure. These results suggest researchers should proceed with caution before drawing analogies between sports wagering markets and real financial markets. They also show that financial markets can be efficient despite numerous obstacles to arbitrage.