Rate of Arbitrage and Reconciled Beliefs
Economics Bulletin Vol. 4, No. 1, 2003
Posted: 12 Mar 2012
Date Written: March, 11 2012
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.
JEL Classification: D8
Suggested Citation: Suggested Citation