Back on the Track with the Efficient Markets Hypothesis

IN A 1978 ARTICLE [10] in this journal, Wayne W. Snyder makes an analogy between security markets and pari-mutuel betting on horse races, suggesting that similarities between the two markets form a basis for the application of the theory of efficient markets to pari-mutuel betting. Snyder's analogy is apt, and his weak form test based on his own findings and similar findings by other researchers [4, 6, 7, 8, 11], is a reasonable test of the weak form efficient markets hypothesis. Furthermore, Snyder's discussion of a strong form test provides a useful basis for the formulation of a test of market efficiency; and with further refinement, it can be transformed into a more powerful test that also provides additional insight as to the influence of handicappers' quoted odds on publicly determined odds. This note further clarifies the applicability of the efficient markets model to pari-mutuel betting markets, and defines and implements a strong form test1 of the efficiency of pari-mutuel betting markets which is a logical extension of Snyder's work. In laying the groundwork for his strong form test, Snyder correctly argues that "owners, trainers, jockeys, grooms, and clockers ... aspire to corner special information ..." The implication is that such "insiders" are sometimes able to realize above-average profits as a result of monopolistic access to information. He bases his test of the strong-form hypothesis on the odds predicted by another group, the handicappers whose "expert opinions" are published in the Daily Racing Form, daily newspapers, and the track program. There is doubt as to whether handicappers can be considered insiders in the sense of having monopolistic access to information, as the odds which they quote are based primarily on information available in the Daily Racing Form, which is widely disseminated to bettors at the track which is the subject of Snyder's study. Furthermore, handicappers' odds are published prior to races with the express purpose of providing handicapping aid to the betting public. Thus it is reasonable to view handicappers as the race track analogue to brokerage firm and other advisory service financial analysts who "handicap" the stock market. Both race track handicappers and financial analysts are "experts" whose primary sources of information are publicly available data used in handicapping their respective markets. In this context, it seems more appropriate to consider a test of the efficiency of pari-mutuel markets * Financial Economist, Federal Savings and Loan Insurance Corporation, and Professor of Accountancy, Wright State University, respectively. ' As suggested in this paper, it may be more appropriate to consider both Snyder's original efforts and the test proposed in this paper as a test of the semi-strong rather than the strong efficient market hypothesis.