Department of Economics, College of Commerce and Industry, Clemson University. We thank Bill Dougan, Ken French, Mason Gerety, David B. Gordon, Matt Lindsay, Mike Maloney, Harold Mulherin, and Stephen Buser and René Stulz (the editors) for their helpful comments.
Fundamentals or Noise? Evidence from the Professional Basketball Betting Market
Article first published online: 30 APR 2012
1993 The American Finance Association
The Journal of Finance
Volume 48, Issue 4, pages 1193–1209, September 1993
How to Cite
BROWN, W. O. and SAUER, R. D. (1993), Fundamentals or Noise? Evidence from the Professional Basketball Betting Market. The Journal of Finance, 48: 1193–1209. doi: 10.1111/j.1540-6261.1993.tb04751.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper uses the betting market for professional basketball games to address the issue of unexplained asset price volatility. A pricing model is presented which identifies two components in point spreads for professional basketball games. Both components—the market's estimate of relative team abilities and an idiosyncratic factor—are essentially unobserved, but can be identified ex post. The structure of this market enables tests of competing hypotheses about point spread variation. The tests reject the hypothesis that variation in the two components represents irrelevant noise. The hypothesis that unobserved fundamentals account for this variation is consistent with the data.