Exploring Decision Makers' Use of Price Information in a Speculative Market

We explore the extent to which the decisions of participants in a speculative market effectively account for information contained in prices and price movements. The horserace betting market is chosen as an ideal environment to explore these issues. A conditional logit model is constructed to determine winning probabilities based on bookmakers’ closing prices and the time indexed movement of prices to the market close. The paper incorporates a technique for extracting predictors from price (odds) curves using orthogonal polynomials. The results indicate that closing prices do not fully incorporate market price information, particularly information which is less readily discernable by market participants.