Serial Correlation in the Wagering Market for Professional Basketball
Journal article by Dale R. Oorlog; Quarterly Journal of Business and Economics, Vol. 34, 1995
Journal Article Excerpt
Serial correlation in the wagering market for professional basketball. by Dale R. Oorlog INTRODUCTION Debate continues over the validity of the efficient market hypothesis (EMH), which holds that security prices fully reflect all available information at any given time. Fama (1970) has categorized market efficiency into three levels in which the definition of information varies: * The weak form, which deals with the information contained in previous prices or price trends; * The semi-strong form, which broadens the definition to include all publicly available information; and * The strong form, which broadens the definition to include even privately held information. Exhaustive tests have been conducted to determine the level of efficiency of large financial markets. This paper shifts the focus of the debate to a smaller speculative market - sports gambling - where new, more definitive evidence is available that suggests that this more thinly traded market achieves a high degree of weak form efficiency. If the EMH is true, no systematic trading strategy will result in significantly abnormal returns. At the weak level this refers to strategies based on previous prices or price trends. By analogy to the sports gambling market, the fact that a team is successful in its last game (after adjusting for the handicapping of the point spread) should provide no information on its expected success in the next game. This paper conducts primarily weak form tests on the National Basketball Association (NBA) for the 1989-1990 and 1990-1991 seasons. Previous research in this field has dealt with semi-strong form tests of contests of the National Football League. The length of the NBA season (82 games versus 16 in the NFL) affords the opportunity to conduct more powerful tests of the market's ability to accurately adjust point spreads for a team from game to game throughout a season. The results indicate that this adjustment is highly accurate, so that betting strategies based on previous performances fail to provide abnormal returns after transaction costs. POINT-SPREAD GAMBLING Professional bookmakers offer the opportunity for speculators to wager on the outcome of games in the NBA.(1) Betting is facilitated by establishing a point spread between the two competing teams: the less favored (underdog) team has a predetermined number of points added to its actual score. For example, if Orlando is a six point underdog against Milwaukee, the Orlando team will have six points added to its final score for the purpose of determining which team covers (wins the bet). In case of a push (a tie after adjusting for the spread), all money is returned to the bettors. In Nevada winning bettors receive $10 for every $11 wagered, i.e., an $11 winning bet returns $21. Therefore, if $11 are wagered on each team, the bookmaker collects a total of $22 and pays $21 to the winner, leaving an instantaneous risk-free profit of $1 (the vigorish). The purpose of the point spread is to equalize the betting support for the two teams. If the market is imbalanced, the point spread must be adjusted (for example, by giving Orlando another point to induce more speculators to take their side). The point spread, therefore, represents the betting public's opinion on the probable outcome of the game, not the bookmakers'.(2) Seen in this light, the point spread on a sporting event corresponds to the price of each team in the market. The bookmaker functions as a market maker, matching customer orders and adjusting prices to bring the market into balance (and earning a fee for his or her services). Speculators in this market analyze the participants exhaustively, searching for new information and market-beating systems.(3) Persons unfamiliar with bookmaking may assume that the market is not as efficient as the stock market, given that markets are driven to efficiency by the depth of trading volume and analysis. For example, common stock trading in the U.S. currently averages between $3 trillion and $4 trillion a year, while sports wagering is estimated to be only about $100 billion a year (Cook 1992). In addition, the underground nature of most sports gambling means that the market is unregulated and not freely accessible, while information on the participants is not as readily disseminated. PREVIOUS LITERATURE, DATA, AND METHODOLOGYPrevious papers investigating the point-spread gambling market have focused on measuring the ability of simple betting rules to generate returns significantly different from 50 percent and/or whether the point spread is an unbiased predictor of actual results. Dare and MacDonald (1991), Gandar et al. (1988), and Zuber et al. (1985) support the ... |
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