Introduction

In this chapter, we build upon work by Vaughan Williams (2000, 2001) and Paton and Vaughan Williams (2005) who examine the concept of Quasi-Arbitrage Opportunities (Quarbs), a class of weak form market inefficiencies. Quarbs exploit apparent differences in subjective assessments of the value of an asset (in this study the asset is a class of state contingent claims, namely racehorse bets). Such a strategy requires the existence of a number of market-makers contemporaneously offering the same asset at different prices. The assumption underpinning a Quarb strategy is that the consensus market price is a better indicator of the asset's objective value than the outlier price. Further, if we can estimate the true or objective value of the asset from the market mean price, it may be possible to trade the asset profitably at the outlier price (in the case of racehorse bets, by obtaining longer odds than the mean).

Our chapter describes the application of a simple Quarb model to two distinct datasets, one comprising 549 races, the other 700 races, to establish whether or not this type of inefficiency is evident in fixed-odds horse-race betting markets in the UK, and whether it can be exploited with an appropriate betting strategy. Specifically, the initial premise is that the mean morning odds available about a horse are a more accurate reflection of its winning chance than the odds outlier.