Gamblers predicted Brexit before financial traders, study finds

fpjl2 — Fri, 11 Jan 2019 11:19:12 +0000

International finance markets lagged behind punters having a flutter when it came to getting the right result on EU referendum night, according to research.

A study shows that gamblers sensed the Leave vote coming an hour before the currency experts in the city – creating a window of “arbitrage” during which the price difference between betting and FX markets yielded up to a 7% return on the pound.

Researchers from the Faculty of Economics compared the behaviours of the Betfair betting market and the sterling-dollar exchange rate from closure of the polls at 10pm, when odds of 10 to 1 were being offered on Brexit.

Both markets were “informationally inefficient”: very slow to react despite the data already available, as well as that flooding in from vote counts across the country. This meant there was money to be made by trading early on either market, say researchers.

̽��ֱ��study shows the betting market moved to a Leave result around 3am, by which time Brexit odds had reversed (1 to 10). Yet the foreign exchange market didn’t fully adjust to the reality of Brexit until around 4am. At 4:40am the BBC predicted a Leave victory.

̽��ֱ��difference in efficiency between the two markets created an hour when selling sterling and hedging the result of the referendum on Betfair would have made up to nine US cents of profit per UK pound – a significant “unleveraged return” that, in theory at least, could have seen astute traders make millions.

Researchers say the findings support the idea that gambling, or so-called “prediction markets”, might provide better forecasts of election outcomes than either experts or polls.

“Clearly, punters trading on Betfair are a different group of people to those dealing in FX for international finance. It looks like the gamblers had a better sense that Leave could win, or that it could at least go either way,” said Dr Tom Auld, lead author of the study published recently in the International Journal of Forecasting.

“Our findings suggest that participants across both markets suffered a behavioural bias as the results unfolded. Initially, both traders and gamblers could not believe the UK was voting to leave the EU, but this disbelief lingered far longer in the city.”

Auld and his co-author Prof Oliver Linton used the expected outcomes for each voting area – data that was publicly available prior to the referendum – to create a “forecasting model”.

By adjusting it with each actual result in turn, they say that their model would have predicted the final result from around 1:30am had it been deployed on the night.

“According to theories such as the ‘efficient market hypothesis’, the markets discount all publicly available information, so you cannot get an edge on the market with data already out there,” said Auld.

“However, using data publicly available at the time we show that the financial markets were very inefficient, and should have predicted Brexit possibly over two hours before they actually did.”

“If there is a second referendum, the vote should be better understood by markets – in line with a theoretical concept called the adaptive markets hypothesis. Studies such as ours will mean that market participants will be primed to profit from any possible opportunities and inefficiencies,” he said.

̽��ֱ��researchers compared their modelling with gambling and currency market data from EU referendum night. ̽��ֱ��website Betfair provided data from their exchange platform – the world’s largest betting exchange – between 10am on June 23 and 5am on June 24.

More than 182,000 individual bets were placed with Betfair and over 88,000 trades were made in the GBP futures market during this seven-hour window. Trading on Brexit broke records for a political event on Betfair, with over £128m wagered including over £50m that was matched on the night of the vote itself.

“Prediction markets such as betting exchanges are an ‘incentive compatible’ way to elicit the private opinions of participants, as people are putting their money where their mouth is, whereas what they tell pollsters can be cheap talk,” added Auld.

“Prediction markets could in theory be used to help value or price financial assets during events such as major votes. This is an area I will be focusing on for future research.”

Research shows how financial markets should have predicted Brexit hours before they eventually did, and that betting markets beat currency markets to the result by an hour – producing a “close to risk-free” profit-making opportunity, according to economists.

It looks like the gamblers had a better sense that Leave could win, or that it could at least go either way

Tom Auld

Lachlan Gowen

̽��ֱ��financial trading centre in the heart of London

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Global economic institute creates partnership with Cambridge economists

ljm67 — Fri, 15 Feb 2013 12:06:20 +0000

Economists at the ̽��ֱ�� of Cambridge have joined forces with the New York-based Institute for New Economic Thinking (INET) to advance innovative approaches to understanding how our economy and the associated financial system really work.

In the context of financial contagion, persistent unemployment, rising inequality and intense pressure on government budgets, economists around the world recognize that conventional doctrines and models need to be reassessed. .

INET was created to facilitate this critical enquiry and broaden and accelerate the development of economic thinking that can lead to solutions for the great challenges of the 21st century.

̽��ֱ��Cambridge-INET Institute is being set up through a $ 3.75 million grant from the INET that has been matched 1:1 with funding from ̽��ֱ��Keynes Fund for Applied Economics, Mohammed El Erian, the Cambridge Endowment for Research in Finance, ̽��ֱ��Isaac Newton Trust and the Faculty of Economics..

Inaugural Director of Cambridge-INET, Professor Sanjeev Goyal, said: “Our Faculty members are at the forefront of new economic thinking about individual behaviour, the networks that shape economic exchange, the econometric analysis of financial markets, and the transmission mechanisms which relate the financial sector to the rest of the economy.”

He added: “ ̽��ֱ��support which went into the setting up of the institute – from INET itself and other matched funding – is recognition of the quality and importance of our research. It will help us to consolidate further the status of the Faculty as a leading centre for fundamental research in economics.”

̽��ֱ��Cambridge-INET will support doctoral research through PhD studentships, appoint a number of post-doctoral fellowships every year, host leading international economists, sponsor major conferences and provide seed funding for cutting-edge research projects.

̽��ֱ��Institute has four themes of research:

Networks, crowds and markets: Facebook, Twitter, the World Wide Web, airline routing, British Rail and inter-bank loans are example of networks. What are the incentives to create and dissolve links? How do these networks shape economic performance? This theme is coordinated by Prof. Sanjeev Goyal.
Transmission mechanisms and economic policy: There has been increasing interest in the study of the role of financial frictions and distortions in shaping the transmission of shocks and policies, and determining the level of demand and economic activity both within and across borders. This theme is coordinated by Prof. Giancarlo Corsetti (who is also Deputy Director of the Institute).
Information, uncertainty and incentives: Economic phenomena arise out individual decisions. The research aims to deepen our understanding of risk-sharing, herding and crises in financial markets, and the incentives and efficiency of auctions and matching mechanisms. This theme is coordinated by Prof. Hamid Sabourian.
Empirical Analysis of Financial Markets: Financial markets serve the important function of transferring risk across individuals and over time, and they provide information on the performance of firms and economies. So their effective performance is of great interest to policymakers, pension holders, and consumers, yet recent events have created profound mistrust about their operation. This theme is coordinated by Prof. Oliver Linton.

For more information visit https://www.econ.cam.ac.uk/CIIT

In the wake of the global financial crisis, a new partnership plans to shake up economic thinking to reflect a rapidly changing world.

̽��ֱ��support which went into the setting up of the institute is recognition of the quality and importance of our research

Sanjeev Goyal

Tim Holt

Money4web

This work is licensed under a Creative Commons Licence. If you use this content on your site please link back to this page.

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̽��ֱ�� of Cambridge - Oliver Linton

Gamblers predicted Brexit before financial traders, study finds

Global economic institute creates partnership with Cambridge economists