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Rate of arbitrage and reconciled beliefs

Abstract : Any group of risk neutral agents who hold differing beliefs is vulnerable to money pumps (arbitrage). Thus, the agents may wish to reconcile their beliefs into a new joint belief. We propose a criterion for the choice of reconciled belief based on the notion of ``rate of arbitrage.'' It is shown that there exists a unique belief (probability distribution) that minimizes the maximal expected rate of arbitrage, and an explicit formula for this belief is given.
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Submitted on : Thursday, November 25, 2010 - 11:28:40 AM
Last modification on : Thursday, March 14, 2019 - 2:54:04 PM

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  • HAL Id : hal-00539814, version 1

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Marco Scarsini, Yossi Feinberg. Rate of arbitrage and reconciled beliefs. Economics Bulletin, Economics Bulletin, 2003, Vol. 4, N° 11, pp.1-12. ⟨hal-00539814⟩

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