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Sports betting is the favorite entertainment of many people. However, bookmakers are reportedly more skilled at predicting game outcomes than bettors, and betting markets are therefore extraordinarily efficient. Betting shops' wide spreads are an additional obstacle. This means that it is exceptionally hard to beat the house in this game.
But one remarkable academic study shows that there are inefficiencies in publicly listed soccer clubs' stocks, which can be exploited. Investors systematically overvalue stocks before important matches as they believe in positive outcomes. Teams often draw or lose a game, and stocks incur negative returns. A complicated variant of this strategy (not stated in this version, but theoretically feasible) could be created by using booking shops to hedge equity market transactions.
Fundamental reason
The academic paper postulates that an important reason for the stock market's apparent inefficient response to soccer game results is the systematic bias in investors' beliefs about the probability distribution of match outcomes. Bookmaker odds are compiled by a small group of experts and do not reflect investors' subjective beliefs, while equity prices do so.
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Market Factors
Confidence in Anomaly's Validity
Period of Rebalancing
Number of Traded Instruments
Notes to Number of Traded Instruments
Complexity Evaluation
Financial instruments
Backtest period from source paper
Indicative Performance
Notes to Indicative Performance
Estimated Volatility
Notes to Estimated Volatility
Notes to Maximum drawdown
Sharpe Ratio
Regions
Simple trading strategy
The investment universe consists of liquid soccer clubs' stocks that are publicly traded. The investor then sells short stocks of clubs that play UEFA Championship matches (or other important matches) at the end of the business day before the match. Stocks are held for one day, and the portfolio of stocks is equally weighted (if there are multiple clubs with matches that day).
Hedge for stocks during bear markets
Yes – The short-selling strategy is a natural hedge/diversification to equity market factor during bear markets.
Out-of-sample strategy's implementation/validation in QuantConnect's framework(chart, statistics & code)
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Source paper
Bernile, Lyandres: Understanding Investor Sentiment: The Case of Soccer
Abstract: We examine whether investors' biased ex-ante beliefs regarding probability distributions of future event outcomes are partially responsible for instances of stock market's inefficient responses to resolutions of uncertainty. We use a sample of publicly traded European soccer clubs and analyze their returns around important matches. Using a novel proxy for investors' expectations based on contracts traded on betting exchanges (prediction markets), we find that within our sample investor sentiment is attributable in part to a systematic bias in investors' ex-ante expectations. Investors are overly optimistic about their teams' prospects ex-ante and, on average, end up disappointed ex-post, leading to negative post-game abnormal returns. Our evidence may have important implications for firms' investment decisions and corporate control transactions.