When you sit in Canberra and watch what happens to the value of your Aussie dollar it's not surprising that you thoughts turn to the efficiency of markets. When I first handed over 100 of my hard earned after landing at Los Angeles 20 odd years ago I was given 110 greenbacks in return. Last year it was down to 67 and today I have woken to the news that A$100 is worth but US$50.70.
Not that it's having found a new way to knock off my money that sets me thinking about market efficiency. It's all those economic pundits from this international bank and that international bank I've got it in for. They are the ones who were pontificating for months about the Aussie dollar being grossly undervalued at 60 US cents. And I wasn't the only one taken in by the false prophets of a better value Australian dollar to come. The currency futures markets at the start of this year had a 50 cent $A as a real underdog.
I should have known better. For me the Aussie dollar is a home dog and with my bookmaker's hat on I know what happens to them. Home dogs cover the line far more often than the odds predict. If Canbet laid nothing else but them I wouldn't even have 50 cents in the dollar!
But don't take a bookies' word for it. Call up the assistance of the Fuqua School of Business at Duke University and have a look at Phillip K. and Stephen F. Gray's paper called "Testing Market Efficiency: Evidence from the NFL Sports Betting Market".
In the words of the abstract: "This paper examines the efficiency of the National Football League betting market. A probit model replaces the standard OLS regression methodology. This circumvents potential econometric problems, and allows us to implement more sophisticated betting strategies where bets are placed only when there is a relatively high probability of success. In-sample tests indicate that probit-based betting strategies generate statistically significant profits. Whereas the profitability of a number of these betting strategies is confirmed by out-of-sample testing, there is some inconsistency among the remaining out-of-sample predictions. Our results also suggest that widely documented inefficiencies in this market tend to dissipate over time."
Which translated means that when the pair of academics looked at NFL results against the line for the period 1976 to 1994 they found that you could beat the vigorish by backing all the home dogs. Furthermore you could do even better if you backed all the home dogs that were on a losing streak.
As to their finding that "widely documented inefficiencies in this market tend to dissipate over time", my new-found Aussie dollar inspired curiosity about market efficiency, and led me to do a little research to update the figures of the Messrs Gray. The findings are summarised in the following table analysing NFL games since 1976 to the end of the 2000 season.
Sample
Spread
Result
Difference
Wins
Losses
Draws
W%
All Favorites
4625
-5.84
5.56
-0.28
2179
2324
122
48.39%
All Dogs
4625
5.84
-5.56
0.28
2324
2179
122
51.61%
All Home Teams
4704
-2.80
3.29
0.49
2350
2232
122
51.29%
All Away Teams
4704
2.80
-3.29
-0.49
2232
2350
122
48.71%
HT Favorites
3175
-6.33
6.47
-0.14
1541
1563
71
49.65%
HT Dogs
1449
4.78
-3.58
1.20
760
638
51
54.36%
AT Favorites
1449
-4.75
3.50
1.25
638
760
51
45.64%
AT Dogs
3175
6.33
-6.47
-0.14
1563
1541
71
50.35%
As you can see, the spread predicted that all favorites would win by an average of 5.84 points. The actual result was an average difference of 5.56 points. The market had the favorites in too well - 48.4% of favorites won against the spread, which in theory is handicapping the games to give a 50:50 result.
Home teams did far better and home team dogs better still. The figure of 54.26% home team dogs winning against the line would have shown players a profit when betting the standard 110 to win a 100 and a very nice earn indeed if Canbet had been around for the whole period betting -107!
My experience as a bookie tells me that the value in home dogs is as strong as ever despite the result for last season. It is something I notice not just in the NFL, but also in every code of football played in every country.
And the good news is that a 48 cents Aussie dollar is now the favorite on the foreign exchange market. I'll be backing the dog. Come on you 60 cents.
Richard Farmer has over forty years of experience in the wagering industry both as a businessman and a punter. He was one of the founding shareholders of CANBET and has been integral in the development of both its system and marketing plan. He can be reached at: corporate.office@canbet.com.au.
