Rate of Arbitrage and Reconciled Beliefs

Economics Bulletin Vol. 4, No. 1, 2003

Posted: 12 Mar 2012

See all articles by Yossi Feinberg

Yossi Feinberg

Stanford Graduate School of Business

Marco Scarsini

Luiss University Dipartimento di Economia e Finanza

Date Written: March, 11 2012

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.

JEL Classification: D8

Suggested Citation

Feinberg, Yossi and Scarsini, Marco, Rate of Arbitrage and Reconciled Beliefs (March, 11 2012). Economics Bulletin Vol. 4, No. 1, 2003, Available at SSRN: https://ssrn.com/abstract=2019823

Yossi Feinberg

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Marco Scarsini (Contact Author)

Luiss University Dipartimento di Economia e Finanza ( email )

Viale Romania 32
Rome, RM 00197
Italy

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