The behaviour of betting and currency markets on the night of the EU referendum |
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Institution: | 1. Université Laval, Quebec, Canada;2. University of Toronto, Ontario, Canada;3. McMaster University, Canada;1. Instituto Nacional de Estadística y Geografía, Mexico;2. University of Liverpool Management School;3. Università di Sassari and CRENoS, Italy;4. Instituto Flores de Lemus and Department of Statistics, Universidad Carlos III de Madrid, Spain;1. Università di Roma “Tor Vergata”, Italy;2. ISTAT, Italy |
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Abstract: | We study the behaviours of the Betfair betting market and the sterling/dollar exchange rate (futures price) during 24 June 2016, the night of the EU referendum. We investigate how the two markets responded to the announcement of the voting results by employing a Bayesian updating methodology to update prior opinion about the likelihood of the final outcome of the vote. We then relate the voting model to the real-time evolution of the market-determined prices as the results were announced. We find that, although both markets appear to be inefficient in absorbing the new information contained in the vote outcomes, the betting market seems less inefficient than the FX market. The different rates of convergence to the fundamental value between the two markets lead to highly profitable arbitrage opportunities. |
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Keywords: | EU referendum Prediction markets Machine learning Efficient markets hypothesis Pairs trading Cointegration Bayesian methods Exchange rates |
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