Hedging on Betting Markets
The possibility to use hedging strategies is an often neglected aspect in the literature on prediction/betting markets, as most papers assume that bettors will bet according to their beliefs about the probability of the outcome of the event, as opposed to the direction in which the odds will move. T...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2020-08-01
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| Series: | Risks |
| Subjects: | |
| Online Access: | https://www.mdpi.com/2227-9091/8/3/88 |
| _version_ | 1797555777521582080 |
|---|---|
| author | Gustav Axén Dominic Cortis |
| author_facet | Gustav Axén Dominic Cortis |
| author_sort | Gustav Axén |
| collection | DOAJ |
| description | The possibility to use hedging strategies is an often neglected aspect in the literature on prediction/betting markets, as most papers assume that bettors will bet according to their beliefs about the probability of the outcome of the event, as opposed to the direction in which the odds will move. This ignores strategies that try to buy low and sell high through exploiting price changes, which is an important aspect to incorporate to fully understand market pricing. In this paper, we derive the key mathematical results in using hedging strategies through taking opposite positions to an initial bet after the market odds have changed and show that a profit can be made without explicitly speculating on the probability of the outcomes. We also discuss two sources of inefficiency that can arise when using hedging strategies in practice: (<i>i</i>) the need to pay a fee when using a betting exchange and (<i>ii</i>) the lack of a lay option (the possibility to bet against outcomes) on some markets, and we analyze how they affect the possibilities to hedge. Many of the results have interesting properties when expressed in terms of the naive probabilities implied by the odds. |
| first_indexed | 2024-03-10T16:52:30Z |
| format | Article |
| id | doaj.art-f834ad9b81bb4a33a75428621a91b31b |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-10T16:52:30Z |
| publishDate | 2020-08-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-f834ad9b81bb4a33a75428621a91b31b2023-11-20T11:16:56ZengMDPI AGRisks2227-90912020-08-01838810.3390/risks8030088Hedging on Betting MarketsGustav Axén0Dominic Cortis1Private Practice, 117 37 Stockholm, SwedenDepartment of Insurance, FEMA, University of Malta, Msida, 2080 MSD, MaltaThe possibility to use hedging strategies is an often neglected aspect in the literature on prediction/betting markets, as most papers assume that bettors will bet according to their beliefs about the probability of the outcome of the event, as opposed to the direction in which the odds will move. This ignores strategies that try to buy low and sell high through exploiting price changes, which is an important aspect to incorporate to fully understand market pricing. In this paper, we derive the key mathematical results in using hedging strategies through taking opposite positions to an initial bet after the market odds have changed and show that a profit can be made without explicitly speculating on the probability of the outcomes. We also discuss two sources of inefficiency that can arise when using hedging strategies in practice: (<i>i</i>) the need to pay a fee when using a betting exchange and (<i>ii</i>) the lack of a lay option (the possibility to bet against outcomes) on some markets, and we analyze how they affect the possibilities to hedge. Many of the results have interesting properties when expressed in terms of the naive probabilities implied by the odds.https://www.mdpi.com/2227-9091/8/3/88betting marketsDutchinghedgingbetting exchangebetting riskcash out |
| spellingShingle | Gustav Axén Dominic Cortis Hedging on Betting Markets Risks betting markets Dutching hedging betting exchange betting risk cash out |
| title | Hedging on Betting Markets |
| title_full | Hedging on Betting Markets |
| title_fullStr | Hedging on Betting Markets |
| title_full_unstemmed | Hedging on Betting Markets |
| title_short | Hedging on Betting Markets |
| title_sort | hedging on betting markets |
| topic | betting markets Dutching hedging betting exchange betting risk cash out |
| url | https://www.mdpi.com/2227-9091/8/3/88 |
| work_keys_str_mv | AT gustavaxen hedgingonbettingmarkets AT dominiccortis hedgingonbettingmarkets |