Rate of arbitrage and reconciled beliefs

Marco Scarsini (1, 2) , Yossi Feinberg (3)

1 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC
2 Dipartimento di Scienze Economiche e Aziendali
3 MEDS, Northwestern University

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.

Keywords: Subjective probability; Dutch book; betting system; zero-sum game; arbitrage; inconsistent beliefs.; inconsistent beliefs

Domains: Humanities and Social Sciences; Economics and Finance; Economy and decision science

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