Academic journal article Economic Inquiry

Sentiment Bias and Asset Prices: Evidence from Sports Betting Markets and Social Media

Academic journal article Economic Inquiry

Sentiment Bias and Asset Prices: Evidence from Sports Betting Markets and Social Media

Article excerpt

I. INTRODUCTION

A growing literature examines the effects of investor sentiment on prices in financial markets. Investor sentiment refers to behavior on the part of investors that differs systematically from the predictions of standard rational choice models. Early research on investor sentiment focused on explaining the apparent over-reaction and under-reaction of stock prices to good and bad news in financial markets (Lee, Shleifer, and Thaler 1991). Later research expanded investor sentiment to include any "nonmaximizing trading pattern among noise traders that can be attributed to a particular exogenous motivation" (Avery and Chevalier 1999, 493).

Identifying settings where investor sentiment occurs is important; several recent papers look for evidence in sports betting markets. These simple financial markets have clear payoffs at a specific point in time, and the teams involved have identifiable characteristics plausibly linked to the presence of investor sentiment. In this setting, investor sentiment can stem from the popularity and emotional attachment to certain teams that would lead bettors to wager on certain teams due to loyalty (Braun and Kvasnicka 2013; Franck, Verbeek, and Ntiesch 2011). The presence of sentiment bias can affect bookmakers' odds or point spreads. Bookmakers may adjust their odds or point spreads due to the presence of investor sentiment but cannot adjust too much because informed and unbiased bettors could take the other side when odds or point spreads reflect sentiment, reducing the bookmaker's profit.

This article develops evidence consistent with the presence of sentiment bias in prices in sports betting markets in professional leagues in Europe and North America. Our sample contains all regular season games from the "big 5" European football leagues (England, France, Germany, Italy, and Spain), the National Basketball Association (NBA), and the National Football League (NFL), over several seasons. The paper builds on the research by Braun and Kvasnicka (2013), Forrest and Simmons (2008), and Franck, Verbeek, and Ntiesch (2011) who analyzed bet outcomes and found evidence of sentiment bias in European football betting. In contrast to the sentiment bias proxy variable used in previous research, differences in attendance at home games or matches, we use a team popularity measure based on information revealed by fans on the social media platform Facebook to identify the presence of investors with sentiment bias. We employ the number of Facebook "Likes" received by each team as a proxy for the presence of fans exhibiting sentiment bias in betting markets.

As of March 2013, Facebook had over one billion active users worldwide (Associated Press 2013). Nearly all sports teams in major professional leagues have official pages on Facebook where all members of this social networking platform can click the "Like" button to signal approval of or affinity with the team. Facebook "Likes" represent a better proxy for the size of a team's fan base and the number of bettors who exhibit sentiment bias toward this team than the existing attendance-based proxies used in the literature, which are limited to fans who can travel to games or matches and constrained by stadium capacity.

This analysis of prices set in sports betting markets--betting odds in five top European professional football leagues and two major North-American professional sports leagues--reveals evidence of price-insensitive investors with sentiment bias. The larger the share of Facebook "Likes" attributable to the home team, the lower the odds or the larger the point spreads set by bookmakers for home wins on those matches, even when controlling for the relative strengths of the two teams involved and other unobservable factors. These price changes indicate investor sentiment in these markets, supporting results in the existing literature using attendance-based indicators for investor sentiment. …

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