SOURCE: Kansas State University
MANHATTAN, KS–(Marketwire – August 12, 2010) – When placing a spread bet on college football, a bettor’s success might have as much to do with geography as with luck.
When a Kansas State University economist combined his enthusiasm for college football with his expertise in arid land studies, he and a colleague found that bettors have a good chance of making money by placing a spread bet on an arid-region team when it hosts a humid-region team.
K-State’s Daniel Kuester is an assistant professor and the Roger Trenary Chair in Economics at K-State. He’s also a college football enthusiast and the executive director of the Association of Arid Lands Studies.
This triangle of interests led to the spread betting market research published in the November 2009 issue of the Journal of Economics and Finance. His co-author is Shane Sanders, an assistant professor of economics at Nicholls State University who received his doctorate in economics from K-State.
Their study shows that a considerable spread betting bias occurs when NCAA Division I-A college football teams from humid regions travel to arid regions. This discovery opens up a significant opportunity for profit in the spread-betting market.
“As economists we expect markets to be efficient,” Kuester said. “I find any market that behaves differently than we expect fascinating. I certainly didn’t expect there to be an arbitrage opportunity that was statistically significant when studying this data.”
In spread-betting markets, wagers are made based on whether a favored team will win by a certain margin, which is the point spread. An efficient market will feature a final pre-game spread that constitutes the median expected game outcome, where the spread is met by the favored team half of the time.
Using data from the Phil Steele’s College Football Preview Magazine — which uses betting lines in Las Vegas for information — Kuester and Sanders studied the spread betting market of 4,345 games during the seven seasons of NCAA Division I-A football from 2000 to 2006.
The researchers were trying to determine if the market is efficient — that the market prices fully reflect all known information. In an efficient market, there should be no advantage because there should be no additional information not already available to everyone else in the market.
Because college football is a physically strenuous outdoor sport in which teams often play in regions they’re not acclimated to, the researchers wanted to know whether bettors understand the effects of regional climate on athletes. If these effects aren’t understood in the market, betting markets for interregional games will likely be less efficient than betting markets for intraregional games.
The researchers compared betting markets for interregional games where teams in arid regions traveled to play teams in humid regions as well as games where humid-region teams traveled to play teams in arid regions. They also studied markets for intraregional games. Humid or semi-humid regions were defined as those receiving an average annual rainfall of more than 32 inches, and all other regions were classified as arid or semiarid.
Their findings showed that for most of the games played, the spreads were met by the favored team half the time, demonstrating an efficient market.
However, the exception exists for games where teams from humid regions traveled to arid regions. The data showed that teams in arid regions won against the spread in 56 percent of games when they hosted a team from a humid region during the seven-season sample. Therefore, spread betting markets don’t efficiently account for difficulties faced by humid-region teams when traveling to and competing in arid regions.
That means there is a statistically significant profit opportunity for those placing a spread bet on an arid-region team when it hosts a humid-region team.
Because Kuester and Sanders’ results did not show inefficiency in the market for the rest of the games, the researchers said such factors as home field advantage and travel are controlled. They said previous research shows it is rare to find strong form market inefficiency when controlling for a single variable, which makes the effect of climate aridity upon the college football spread betting market dramatic.
“Tests of the efficient market hypothesis get at some very fundamental questions in economics, such as whether market actors behave rationally and to what degree markets generate well-being for society,” Sanders said.
Sanders said inefficient markets are one way of explaining how market bubbles might form. That is when there is a trade in products with inflated values, such as those throughout history like the housing market and numerous stock market bubbles.
Pronouncer: Kuester is KEYS-ter