Prediction accuracy of different market structures - bookmakers versus a betting exchange

There is a well-established body of literature on separately testing the prediction power of different betting market settings. This paper provides an inter-market comparison of the forecasting accuracy of bookmakers and a major betting exchange. Employing a dataset covering all football matches played in the major leagues of the "Big Five" (England, France, Germany, Italy, Spain) during three seasons (5478 games in total), we find evidence that the betting exchange provides more accurate predictions of a given event than bookmakers. A simple betting strategy of selecting bets for which bookmakers offer lower probabilities (higher odds) than the betting exchange generates above average, and in some cases even positive returns. (C) 2010 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.