Betting on the Super Bowl? Read this report on “NFL Alphas” first.
Jan 13th, 2008 | Filed under: CAPM / Alpha TheoryAlthough it’s usually obfuscated by complex mathematics and applied only to world of investment management, “alpha” is a remarkably ubiquitous concept with applications that go well beyond the Capital Asset Pricing Model. Steven Sapra, co-author of a recent paper on 130/30 (see related posting) provides us with proof of this. Regular readers may recall his article about “NFL Alphas” posted on the Analytic Investors website last winter (see related posting). Sapra has continued to research this topic and his latest conclusions are contained in an article to be published in the upcoming edition of the Journal of Sports Economics (a very cool-looking publication that AllAboutAlpha readers may find interesting). The study is also available here.
The article goes by the unwieldy title “Evidence of Betting Market Intra-Season Efficiency and Inter-Season Over-reaction to Unexpected NFL Team Performance”, but can probably be summarized as simply “Don’t Fall for the Darlings”. Sapra compares the expected results of over 4,000 regular season NFL games (based on the point spread) with the actual results of each match-up. If the NFL wager market is perfectly efficient, the actual results should be randomly distributed around the predicted results. In other words, a “fair” point spread means that the marginal bettor is ambivalent between taking either side of a bet - in the same way that the marginal investor should be ambivalent about paying the “fair” price for a security.
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