Risk-Neutral Pricing and Hedging of In-Play Football Bets

Abstract

A risk-neutral valuation framework is developed for pricing and hedging in-play football bets based on modelling scores by independent Poisson processes with constant intensities. The Fundamental Theorems of Asset Pricing are applied to this set-up which enables us to derive novel arbitrage-free valuation formulae for contracts currently traded in the market. We also describe how to calibrate the model to the market and how trades can be replicated and hedged.

Order Statistics of Horse Racing and the Randomly Broken Stick

“…Traditionally, econophysics has somewhat neglected a certain type of financial markets: Betting markets. This is perhaps surprising because economists, on the contrary, have studied betting markets extensively, considering them as a controlled experiment for market efficiency [10,11,12], a key concept in financial economics. Because the outcome of the bet -win or lose -is definitely known after a certain time, it is straightforward to draw conclusions from the discrepancy between the implied market odds 1 and the true winning probability.…”