In this paper we employ a large new data set to examine explanations of the tendency for favourites to be under-bet and longshots over-bet in recent British racetrack betting markets. We demonstrate that both demand and supply side factors can explain this favourite--longshot bias and propose new empirical tests to identify the influence of insider trading on the bias. The results suggest that the adverse selection problem faced by bookmakers, in the context of bettors who may possess superior information, is capable of explaining at least some of the observed bias.
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Williams et al. (1997) studied this question.
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