On the efficiency of racetrack betting market: a new test for the favourite-longshot bias

A number of empirical studies on the efficiency of racetrack betting market have shown the ‘favourite-longshot bias,’ which means longshots are overbet while favourites are underbet. Asian markets such as Hong Kong and Japan, however, have produced some contradictory empirical evidence to the bias. One critical element in the efficiency test procedure is how to assess the unobservable objective winning probability of a horse in a race. This paper proposes a new test framework with a more general evaluation of the objective probability of winning than the traditional method. Unlike the traditional method, our model allows the heterogeneity of the horses and the races. We apply the new empirical method to test whether the favourite-longshot bias is present in racetrack betting market of Korea. We found that the favourite-longshot bias exists in the racetrack market of Korea and the result distinguishes Korean racetrack market from other Asian markets.     

Monotone strong increases in risk and their comparative statics

We introduce a new concept of the monotone strong increase in risk (MSIR) order that imposes monotonicity restrictions on the ratio of the two cumulative of cumulative distribution functions as a special case of Rothschild–Stiglitz increases in risk that is the subset of the second‐degree stochastic dominance criterion. We show that the MSIR order implies that the conditional expectation of a random variable under one cumulative distribution function is greater than or equal to that under another cumulative distribution function. Restricting the payoff function to be linear in the random variable and limiting our analysis to risk‐averse decision‐makers who are prudent, we obtain appealing comparative statics results for the MSIR shift. This general conclusion can be applied to prevailing economic models having a linear payoff.