Risk, Return, and Gambling Market Efficiency

Do not cite unless with written permission of the author. Adjusting for risk in the test of gambling market efficiency The current standard test of efficiency in gambling markets (that is, sports betting including horseracing) is that inefficiency exists when a betting strategy makes money. This level of economic significance is insufficient out-of-hand. Specifically, anyone can make money by buying a risk-free asset. We offer a new test of gambling efficiency that evaluates the risk and return of betting strategies relative to those of alternative investments. The method incorporates the well-documented Kelly criterion into the current method of investigation. The home-underdog bias of NFL games is reinvestigated with the tests indicating the bias is much less of an inefficiency than previously reported. An additional insight provided indicates a rationale for the favorite-longshot bias in horseracing. Correcting for risk-adjusted returns in the test of gambling market efficiency Mark Cuban, the flamboyant owner of the National Basketball Association’