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.
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.
per annum, estimated return based on data from table 4 – annualized (geometrically) daily return 0,88%, estimated 40 days in a year when matches are played
estimated from t-value from table 4
estimated number of stocks used for trading, actual number of stocks could differ as not all soccer clubs mentioned in the study are still listed on market and/or are liquid
not stated
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).
Yes - The short-selling strategy is a natural hedge/diversification to equity market factor during bear markets.
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