An Examination of Prediction Market Efficiency: NBA Contracts on Tradesports

Abstract

In this paper I examine the absolute and relative price efficiency of NBA options listed on Tradesports.com. I find that contracts within specific price bands are misvalued, but also demonstrate that this market is more efficient than is the market for NFL options. Specifically, I show that contracts priced around $25 win (expire at $100) at a rate less than expected, while those priced around $75 win at a rate greater than expected. The magnitudes of these deviations between prices and fundamental values are less than those in the NFL market. Also, while prior theoretical work predicts that low-priced contracts should be overpriced, I instead find that NBA contracts priced near $2.50 win more frequently than expected.

Keywords: Prediction Market, NBA, NFL, Efficiency

JEL Classification: G12, G14