analyticnfl 2013-14 final

8/12/2019 AnalyticNFL 2013-14 Final

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NFLALPHAS

2013-2014


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At ANALYTIC INVESTORS, our day

job is to deliver risk-adjusted returns

in excess of a benchmark; our night

job is also to deliver risk-adjusted

returns in excess of a benchmark.

Yet, somewhere in between, we

produce a quantitative survey

of each NFL season from an

investors perspective. At the heart

of our analysis is a measure of

each teams regular season excess

performance. This excess perfor-

mance, or NFL Alpha, is defned

as the return-on-investment (ROI)that could have been earned by

placing a systematic wager on an

NFL team to win each of its games

outright in the regular season.We

have found that these regular season

NFL Alphas possess strong implica-

tions for both subsequent season

and post-season success.

Boom and Bust

In a rare encore performance,

Andrew Luck and the Indianapolis

Colts were perched atop the NFLAlpha P&L (Table 1)for a second

consecutive year. A casual bettor

would have earned a return of 51.8%

with a wager for the Colts to win

each of their games outright. Despite

having an inferior win-loss record

to ve other teams, at home wins

against the Broncos and the

Seahawks, along with away wins

against the 49ers and the Chiefs, all

as heavy underdogs, made the Colts

an unparalleled investment (Chart 1).

Bookmakers had a tough time pric-

ing the Colts throughout the season

due to an array of injuries and the

personnel changes that resulted from

being eeced by the Browns in the

1

LAST YEARSBlackout Bowl victory by the Baltimore Ravens saw our Super Bowl forecasting

model recover its rightful place in the winners circle. We have now successfully identied the

undervalued contender in nine of the last 10 Super Bowls, and our new streak is at an inspiring

one-in-a-row.

THIS YEARSSuper Bowl pits the NFLs No. 1 scoring offense in the Denver Broncos, against

the NFLs No. 1 scoring defense in the Seattle Seahawks. Both teams entered the season with

high expectations and both teams delivered. The Broncos and Seahawks represented two of

the top three odds-on favorites to reach the big dance, and both nished with an NFL-best 13-3record. The only thing tougher to forecast than the winner of the matchup is the weather at

MetLife Stadium. For sports fans, commercial fans and meteorologists alike, Super Bowl

Sunday is rife with speculation. As always, we hope the analysis that follows fuels even more.

Trent Richardson trade. Somehow

the Colts repeated an 11-5 record,

beat the S&P 500 (32.4%) and made

an inept Cleveland Browns organiza-

tion appear mildly coherent, all in

the same year.

While the Colts were busy winning,

the Houston Texans were cobbling

together an impressive 14 consecu-

tive losses to become this years

worst investment in the NFL.

Clocking in with an abysmal -82.9%

Alpha, they had the lowest Alpha of

any two-win team since the NFL wen

to a 16-game schedule in 1978.

After a successful 12-4 campaign in

2012, expectations were deservedly

sky-high for the Texans heading into

the 2013 season. They started the

season with a pair of unconvincing

wins against two teams that they

were expected to bulldoze.

N F L A L P H A S 2 0 1 4 A N A LY T I C I N V E S T O R S

B A C K I N T H E B L A C KS U P E R B O W L X L V I I I


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Table 1 ALPHAS FOR ALL 32 NFL TEAMS

A L P H A 2 0 1 3 - 2 0 1 4

Alpha Favorite/Team 20 13 -2 01 4 20 12 -2 01 3 Change Record Underdog

Indianapolis Colts 51.8% 59.4% -7.6% 11-5 9-6-1

New York Jets 39.4% -32.8% 72.2% 8-8 5-11Carolina Panthers 32.0% -2.3% 34.3% 12-4 11-5

Arizona Cardinals 31.0% 7.0% 24.0% 10-6 6-10

San Diego Chargers 27.7% -11.2% 38.9% 9-7 6-8-2

New England Patriots 22.7% 0.7% 21.9% 12-4 11-5

Philadelphia Eagles 19.4% -48.2% 67.7% 10-6 12-4

Cincinnati Bengals 18.2% 21.3% -3.1% 11-5 11-5

Seattle Seahawks 13.7% 34.0% -20.2% 13-3 15-1

Miami Dolphins 12.6% -13.8% 26.4% 8-8 7-9

San Francisco 49ers 12.4% 23.1% -10.7% 12-4 14-2

Kansas City Chiefs 12.3% -54.7% 67.1% 11-5 12-4

St. Louis Rams 10.0% 19.4% -9.4% 7-9 4-12

Denver Broncos 4.6% 18.5% -13.9% 13-3 16-0

Jacksonville Jaguars 4.2% -68.5% 72.7% 4-12 0-16

New Orleans Saints 2.8% -19.4% 22.2% 11-5 13-3

Chicago Bears 1.7% -3.7% 5.4% 8-8 7-9

Pittsburgh Steelers -0.3% -2.8% 2.5% 8-8 8-8

New York Giants -1.2% 3.3% -4.5% 7-9 7-9

Baltimore Ravens -3.1% 2.2% -5.3% 8-8 8-8

Buffalo Bills -8.2% -30.7% 22.5% 6-10 2-14

Green Bay Packers -12.1% 5.1% -17.2% 8-7-1 11-5

Dallas Cowboys -13.0% -5.4% -7.5% 8-8 8-8

Tennessee Titans -19.1% -2.1% -17.0% 7-9 7-9

Minnesota Vikings -20.8% -49.4% -70.3% 5-10-1 4-12

Oakland Raiders -25.9% -51.1% 25.2% 4-12 2-14

Detroit Lions -26.0% -52.3% 30.2% 7-9 13-3

Cleveland Browns -37.4% -36.3% -1.0% 4-12 5-11

Tampa Bay Buccaneers -41.4% -5.3% -36.1% 4-12 4-12

Atlanta Falcons -55.0% 41.2% -96.2% 4-12 5-11

Washington Redskins -64.2% 44.9% -109.1% 3-13 4-11

Houston Texans -82.9% 6.0% 88.9% 2-14 7-9

Source: Analytic Investors, n.com

2N F L A L P H A S 2 0 1 4 A N A LY T I C I N V E S T O R S


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1An NFL Alpha is predicated on the assumption that an investor in a team receives the

fair payoff on an investment to win outright. In reality, bookmakers never pay fair odds,

but our model assumes that odds are always fair. The fair payoff is calculated as (1/p-1),

where p=probability of victory. For example, if a team has a 25% probability of victory,

then the fair payoff is 31 (invest $100, win $300). The teams fair probability of victory is

derived from a model, whereby we calculate the probability of victory as a function of the

point spread.

Since the Texans were heavy favor-

ites in these games, the Alpha gener-

ated from these wins was miniscule

and therefore did little to offset the 14

losses that came once the wheels fel

off(Chart 1). It is certainly rare for a

two-win team to have been a heavy

favorite in both of its wins, which was

the primary catalyst for their worst

since 1978 accomplishment.

Manning Expectations

To shed further light on the engineer-

ing behind the alphas, it is useful

to examine the seasons of two

seemingly disparate NFL teams, the

Broncos (13-3, 4.6%Alpha) and the

Jaguars (4-12, 4.2%Alpha). While

their win/loss records would indicate

one to be clearly a better investment

than the other, their performance

relative to betting market expecta-

tions (NFL Alpha) tells a different

story (Chart 2). Bookmakers had the

Broncos favored in each of their 16games, predicting an average margin

of victory of nearly 10 points. On the

other hand, the Jaguars played the

role of underdog in each of their 16

games, with an average predicted

margin of loss of nearly 10 points.

Thus, for the average game, the

Broncos were 1-to-4 favorites while

the Jaguars were 4-to-1 underdogs

to win. In other words, it would take

close to four Bronco wins to earn

the same return as one Jaguar win.

In October, these two teams met in

what was expected to be the most

lopsided game in NFL history.

CUMULATIVE ALPHAS

Chart 1 Indianapolis Colts vs. Houston Texans

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Jacksonville

Jaguars

Denver

Broncos

Chart 2 Denver Broncos vs. Jacksonville Jaguars


G A M E S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

G A M E S


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LOW VOLATILITY BY GAME WEEK

Chart 3 Low vs High Risk Return Chart 4 Low vs High Risk Compound Return

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As 26.5-point underdogs, the

Jaguars were a 50-to-1 longshot to

win. Not surprisingly, if the Jaguars

had deed expectations and won

the game, they would have ended

the season with a 389%Alpha,

nearly three times as high as the

best alpha ever recorded of 132%

by the 1992 Indianapolis Colts.

Slow and Steady

Wins the Race

For roughly the last 10 years, we

have authored research pertaining

to the low volatility anomaly. Namely,

this anomaly describes the propensi-

ty for low systematic risk securities to

outperform those with high systemat-

ic risk. In equity markets, systematic

risk can be quantied by a securitys

beta. In gambling markets, systemat-

ic risk can be analogous to the point-

spread of a game, as dened by

bookmakers. As discussed in a prior

NFL Alpha paper, longshot or

high systematic risk bets tend to be

overpriced and make worse invest-

ments than their favorite or low

systematic risk counterparts. This

year, we examined a potential betting

strategy to exploit this anomaly.

Before each of the 17 game weeks

this year, we separated the weeks

matchups into three bins based on

point-spread/systematic risk: low,

medium, and high. We then com-

puted the hypothetical return to each

bin for a set of xed wagers on its

constituents to win their matchups

outright. In Chart 3, also known as a

compulsive gamblers post-mortem,

we see the return of the low and high

systematic risk bins by game week.

Almost denitionally, the high risk,

longshot bin has much more returnuctuation than that of the low risk,

favorite bin. What may surprise

some is that the average return of

the longshot bin is -14.8%, while

the average return of the favorite

bin is 7.3%. When compounded

throughout the season, the return

to the high systematic risk bin is an

alarming -99.4%, versus 169.4%for

the low systematic risk bin (Chart

4).While a 500-to-1 payout may get

headlines and fuel reveries, it may

not serve as a prudent investment.

Another Anomaly

What happens when you combine

a players nobody believes in usmentality with a stadium lled by his

inebriated fans dressed in adult

Halloween costumes? You get the

home underdog effect, and you

may also get some alpha for your

troubles. The home underdog bias/

anomaly is no stranger to academic

literature; by denition, the anomaly

suggests that home underdogs tend

to be systematically undervalued

in NFL wagering markets. A recent

study here at Analytic Investors has

found this effect to be magnied for

slight home underdogs dened

here as games in which the home

team is expected to lose by a eld

goal or less.

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G A M E SG A M E S

HIGHLOW

FAVORITE

LONGSHOT


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Between 1978 and 2012, and for the

2013 season alone, we have com-

puted the record, both against the

spread and straight up, for slight

home underdogs (Charts 5 and 6).

In all wagering scenarios, the actual

betting success rate was at least 4%

more than what bookmakers expect-

ed. This year, we found the home

underdog bias to be even more pro-

nounced than usual. While the cause

of this anomaly is surrounded by its

fair share of speculation, it is reason-

able to suppose that the benets of

playing at home are more meaningful

when the teams are nearly evenly

matched. So the lesson is, dont get

rid of those Halloween costumes

just yet, because they are a gift thatkeeps on giving.

Low Alphas

Need Not Apply

An interesting by-product of the NFL

Alpha hierarchy is its implications on

relative coaching success. Despite

the fact that the Jacksonville Jaguars

(4.2%) nished with four wins, their

two-win team effort in the 2012-2013

season kept expectations lower than

Richard Shermans approval rating

in San Francisco. Put simply, the

wagering markets were not expect-

ing much, and did not get much from

rst-year head coach Gus Bradleys

roster of junior varsity footballers.

This fact is reected in the Jaguars

Alpha relative to another four-win

team, the Tampa Bay Buccaneers

(-41.4%). After a seven-win cam-

paign in the 2012-2013 season, the

Buccaneers were expected to be a

formidable tackle football team this

go-around. After a series of staph

infections and an 0-8 start, head

coach Greg Schiano became the last

staff infection to be eradicated at the

seasons end. Along with the Bucca-

neers, the Minnesota Vikings, Detroit

Lions, Cleveland Browns, Washing-

ton Redskins, and Houston Texans

all parted ways with their coaches,

representing six of the eight lowest

alpha teams.

Ended at the Bottom

To continue harping on this years

underachievers, the three lowest

Alpha teams also possessed the

three worst year-over-year changes

in NFL Alpha. Per Table 1, the

Falcons, Redskins and Texans saw

their Alphas change by a league-

worst -96.2%, -109.1%, and -88.9%,respectively. Historically, this has

not been an uncommon phenom-

enon. We have found that between

seasons, there tends to be a nega-

tive correlation between the Alphas

earned by NFL teams. Thus, this

seasons underachievers tend to

become next seasons overachiev-

ers, and vice versa. Prior research

here at Analytic Investors has also

suggested that this relationship is

prevalent between each NFL

regular season and post-season.

It is through this relationship that we

forecast our post-season and Super

Bowl selections.

SLIGHT HOME UNDERDOGS

Chart 5 1978-2012 Seasons Chart 6 2013 Season


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EXPECTEDACTUAL


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Table 2 POST SEASON ANALYSIS (5-4-1 RECORD)

WC = WILDCARD / DP = DIVISION / CC = CONFERENCE

* The result of this game matched the point-spread exactly, and therefore did not result in a win or a loss for a wager against the spread.

** While in these games lower-Alpha teams did/did not lose to the higher-Alpha teams, the predictions are correct/incorrect because the lower Alpha

teams covered/did not cover their respective point spreads.


A L P H A T E A M S

HIGHER Alpha LOWER Alpha Favorite Result WIN

WC Indianapolis Colts 51.8%

WC Philadelphia Eagles 19.4%

WC San Diego Chargers 27.7%

WC San Francisco 49ers 12.4%

DP Indianpolis Colts 51.8%

DP Seattle Seahawks 13.7%

DP Carolina Panthers 32.0%

DP San Diego Chargers 27.7%

CC New England Patriots 22.7%

CC Seattle Seahawks 13.7%

Kansas City Chiefs 12.3% Chiefs by 2.5 Colts 45-44

New Orleans Saints 2.8% Eagles by 3 Saints 26-24 4

Cincinnati Bengals 18.2% Bengals by 6 Chargers 27-10

Green Bay Packers -12.1% 49ers by 3 49ers 23-20* N/A

New England Patriots 22.7% Patriots by 7 Patriots 43-22 4

New Orleans Saints 2.8% Seahawks by 9 Seahawks 23-15** 4

San Francisco 49ers 12.4% 49ers by 1 49ers 23-10 4

Denver Broncos 4.6% Broncos by 7.5 Broncos 24-17**

Denver Broncos 4.6% Broncos by 5 Broncos 26-16 4

San Francisco 49ers 12.4% Seahawks by 4 Seahawks 23-17


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555 West Fifth Street, 50th Floor

Los Angeles California 90013

T 213.688.3015 www.aninvestor.com

The opinions expressed herein are those of Analytic Investors and are subject to change

without notice. This research report is prepared for general circulation and is circulated

for general information only. It does not have regard to specic investment objectives,

the nancial situation and the particular needs of any specic person who may receive

this report.

* While in these games lower-Alpha teams did lose to the higher-Alpha teams, the predictions are correct because the lower-Alpha teams covered their

respective point spreads.

Super Bowl XLVIII

This years Super Bowl matchup features the lower-alpha Denver Broncos (4.6%)against the higher-alpha Seattle

Seahawks (13.7%). As noted previously, we have found evidence that lower-alpha teams in the regular season tend to

be undervalued throughout the post- season. Thus, as current 2-point favorites, we think Peyton Manning & Co. will

overcome Richard Shermans arrogance to win this one by at least a eld goal.

SUPERA L P H A T E A M

Prediction

BOWL Date HIGHER LOWER Favorite Result Correct

Correct

XXXVIII 2/01/04 New England Patriots Carolina Panthers Patriots by 7 Patriots 32-29* 4

(67.0%) (39.0%)

XXXIX 2/06/05 New England Patriots Philadelphia Eagles Patriots by 7 Patriots 24-21* 4

(33.5%) (12.6%)

XL 2/05/06 Seattle Seahawks Pittsburgh Steelers Steelers by 4 Steelers 21-10 4

(25.0%) (11.4%)

XLI 2/04/07 Chicago Bears Indianapolis Colts Colts by 6.5 Colts 29-17 4(17.8%) (14.5%)

XLII 2/03/08 New England Patriots New York Giants Patriots by 12.5 Giants 17-14 4

(22.9%) (14.6%)

XLIII 2/01/09 Pittsburgh Steelers Arizona Cardinals Steelers by 6.5 Steelers 27-23* 4

(33.6%) (-6.4%)

XLIV 2/07/10 Indianapolis Colts New Orleans Saints Colts by 4.5 New Orleans 31-17 4

(37.6%) (12.8%)

XLV 2/06/11 Pittsburgh Steelers Green Bay Packers Packers by 3 GreenBay 31-25 4

(28.6%) (1.3%)

XLVI 2/05/12 New York Giants New England Patriots Patriots by 3 Giants 21-17

(32.8%) (15.8%)

XLVII 2/03/13 San Francisco 49ers Baltimore Ravens 49ers by 4.5 Ravens 34-31 4

(23.1%) (2.2%)

XLVIII 2/02/14 Seattle Seahawks Denver Broncos Broncos by 2 ? ?

(13.7%) (4.6%)

7N F L A L P H A S 2 0 1 4

analyticnfl 2013-14 final

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