Discovering a Profitable Trading Strategy in an Apparently Efficient Market: Exploiting the Actions of Less Informed Traders in Speculative Markets


  • Ming-Chien Sung,

  • Johnnie E. V. Johnson,

  • John Peirson

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    • The first and second authors are from the Centre for Risk Research, School of Management, University of Southampton. The third author is from the Department of Economics, Keynes College, University of Kent, Canterbury. They are very grateful for the insightful comments of the editor and an anonymous referee which helped to improve earlier drafts of this paper.

Ming-Chien Sung, Centre for Risk Research, School of Management, University of Southampton, Highfield, Southampton SO17 1BJ, UK. e-mail:


Abstract:  This study explores the extent of mispricing in a market for state contingent claims that is commonly believed to be efficient, the UK horserace betting market. We develop conditional logit models for weekend and weekday markets and show that prices are inefficient at weekends when the presence of a larger proportion of less informed bettors results in mispricing. A Kelly investment strategy focused on high probability outcomes in such markets yields considerable positive returns. We identify the need for research exploring the implications for information suppliers and users, regulators and operators in wider financial markets.