The Distribution of Information in Speculative Markets: A Natural Experiment

Brown, Alasdair (2015) The Distribution of Information in Speculative Markets: A Natural Experiment. The European Journal of Finance. ISSN 1351-847X (In Press)

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We use a unique natural experiment to shed light on the distribution of information in speculative markets. In June 2011, Betfair – a UK betting exchange – levied a tax of up to 60% on all future profits accrued by the top 0.1% of profitable traders. Such a move appears to have driven at least some of these traders off the exchange, taking their information with them. We investigate the effect of the new tax on the forecasting capacity of the exchange (our measure of the market's incorporation of information into the price). We find that there was scant decline in the forecasting capacity of the exchange – relative to a control market – suggesting that the bulk of information had hitherto been held by the majority of traders, rather than the select few affected by the rule change. This result is robust to the choice of forecasting measure, the choice of forecasting interval, and the choice of race type. This provides evidence that more than a few traders are typically involved in the price discovery process in speculative markets.

Item Type: Article
Uncontrolled Keywords: informed trading, natural experiment, betting markets, horse racing
Faculty \ School: Faculty of Social Sciences > School of Economics
Depositing User: Pure Connector
Date Deposited: 16 Feb 2015 17:14
Last Modified: 16 Feb 2015 17:14
DOI: 10.1080/1351847X.2014.972423

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