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Open AccessFeature PaperArticle

Hedging on Betting Markets

1
Private Practice, 117 37 Stockholm, Sweden
2
Department of Insurance, FEMA, University of Malta, Msida, 2080 MSD, Malta
*
Author to whom correspondence should be addressed.
Risks 2020, 8(3), 88; https://doi.org/10.3390/risks8030088
Received: 3 July 2020 / Revised: 27 July 2020 / Accepted: 29 July 2020 / Published: 25 August 2020
(This article belongs to the Special Issue Risks in Gambling)
The possibility to use hedging strategies is an often neglected aspect in the literature on prediction/betting markets, as most papers assume that bettors will bet according to their beliefs about the probability of the outcome of the event, as opposed to the direction in which the odds will move. This ignores strategies that try to buy low and sell high through exploiting price changes, which is an important aspect to incorporate to fully understand market pricing. In this paper, we derive the key mathematical results in using hedging strategies through taking opposite positions to an initial bet after the market odds have changed and show that a profit can be made without explicitly speculating on the probability of the outcomes. We also discuss two sources of inefficiency that can arise when using hedging strategies in practice: (i) the need to pay a fee when using a betting exchange and (ii) the lack of a lay option (the possibility to bet against outcomes) on some markets, and we analyze how they affect the possibilities to hedge. Many of the results have interesting properties when expressed in terms of the naive probabilities implied by the odds. View Full-Text
Keywords: betting markets; Dutching; hedging; betting exchange; betting risk; cash out; lay odds; odds; betting betting markets; Dutching; hedging; betting exchange; betting risk; cash out; lay odds; odds; betting
MDPI and ACS Style

Axén, G.; Cortis, D. Hedging on Betting Markets. Risks 2020, 8, 88. https://doi.org/10.3390/risks8030088

AMA Style

Axén G, Cortis D. Hedging on Betting Markets. Risks. 2020; 8(3):88. https://doi.org/10.3390/risks8030088

Chicago/Turabian Style

Axén, Gustav; Cortis, Dominic. 2020. "Hedging on Betting Markets" Risks 8, no. 3: 88. https://doi.org/10.3390/risks8030088

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