Optimal Mark-up and Arbitrages in the Betting Market

I find that risk-averse bookmakers should charge a higher mark-up on events with a greater number of outcomes. Also, they should dynamically adjust their odds to reduce profit volatility, thus generating arbitrage opportunities. An empirical analysis of the online betting market supports these predictions. In particular, the inclusion of an additional outcome prompts a 1.33% increase in mark-up and arbitrage opportunities arise on a daily basis, with an instantaneous gross rate of return of 1.14% per operation. Overall, however, bettors face an average expected loss of 5.67% and lower prices are strongly and surprisingly associated with better services. These inefficiencies stem from the fact that the betting market is still not perfectly integrated despite its global nature and there are position rents.

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