Johnnie Johnson, Owen Jones and Leilei Tang

Exploring decision-makers' use of price information in a speculative market

Management Science, Vol. 52, No. 6, June 2006, pp. 897-908.

Abstract
We explore the extent to which the decisions of participants in a speculative
market effectively account for information contained in prices and price
movements. The horserace betting market is chosen as an ideal environment to
explore these issues. A conditional logit model is constructed to determine
winning probabilities based on bookmakers' closing prices and the time
indexed movement of prices to the market close. The paper incorporates a
technique for extracting predictors from price (odds) curves using orthogonal
polynomials. The results indicate that closing prices do not fully incorporate
market price information, particularly information which is less readily
discernable by market participants.