Market efficiency analysis requires a sensitivity to market characteristics: some observations on a recent study of betting market efficiency

This short paper offers a critical appraisal of a recent contribution to the debate on efficiency in the particular context of horserace betting markets. A number of specific criticisms are detailed. These include the failure of the authors to capture inefficiency signals which relate to non-winning horses and the weakness of the rule developed to identify inefficiency signals, in terms especially of its arbitrary nature and the fact that it captures a wide range of non-equivalent changes in underlying subjective probability. The nature of the inefficiency signals identified by the rule also arouses suspicions of sample bias. Further concerns relate to the operational limitations of a rule for identifying inefficiency which is only observable at the close of the trading period and the lack of acknowledgement of the highly limited arbitrage opportunities which exist between the parallel bookmaker and parimutuel betting markets which operate in the UK. In general, it is argued that the main limitation of the earlier paper lies in the fact that its methodology, analysis and interpretation of results fail to address the idiosyncrasies of structure and process which characterize betting markets.