The reverse favourite-longshot bias and market efficiency in major league baseball: An update

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Accounting and Finance


This paper compares the accuracy of commonly used tests of market efficiency and provides a recommendation for future research. Interest in sports betting markets as an opportunity to test the efficient market hypothesis remains strong. The most popular form of wagering is against the spread, where the "11 for 10" rule offers bettors the opportunity to wager $1.10 for a chance to win $1. This is the dominant betting methods for sides and totals wagers in football and basketball betting. This paper compares the accuracy of three test statistics commonly employed to approximate the binomial distribution in examinations of market efficiency. While the standard normal and likelihood ratio statistics are nearly identical in terms of accuracy, the standard normal test, corrected for continuity, does offer considerable improvement in many situations. However, given the easy accessibility of computing power, the researchers recommend that future researchers calculate the exact binomial probabilities.