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Rate of Arbitrage and Reconciled Beliefs

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Author Info
Yossi Feinberg () (Graduate School of Business, Stanford University)
Marco Scarsini () (Università di Torino)

Additional information is available for the following registered author(s):

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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File URL: http://www.economicsbulletin.com/2003/volume4/EB-03D80003A.pdf
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Publisher Info
Article provided by Economics Bulletin in its journal Economics Bulletin.

Volume (Year): 4 (2003)
Issue (Month): 11 ()
Pages: 1-12
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:ebl:ecbull:v:4:y:2003:i:11:p:1-12

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Related research
Keywords: arbitrage; betting system; Dutch book; inconsistent beliefs; subjective probability; zero-sum game;

Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
D7 - Microeconomics - - Analysis of Collective Decision-Making

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Feinberg, Yossi, 2000. "Characterizing Common Priors in the Form of Posteriors," Journal of Economic Theory, Elsevier, vol. 91(2), pages 127-179, April. [Downloadable!] (restricted)
  2. Kalai, Ehud & Lehrer, Ehud, 1993. "Rational Learning Leads to Nash Equilibrium," Econometrica, Econometric Society, vol. 61(5), pages 1019-45, September. [Downloadable!] (restricted)
    Other versions:
  3. A. Dawid & M. DeGroot & J. Mortera & R. Cooke & S. French & C. Genest & M. Schervish & D. Lindley & K. McConway & R. Winkler, 1995. "Coherent combination of experts' opinions," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, vol. 4(2), pages 263-313, December. [Downloadable!] (restricted)
  4. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February. [Downloadable!] (restricted)
    Other versions:
  5. Harsanyi, John C, 1995. "Games with Incomplete Information," American Economic Review, American Economic Association, vol. 85(3), pages 291-303, June.
    Other versions:
  6. Kalai, Ehud & Lehrer, Ehud, 1994. "Weak and strong merging of opinions," Journal of Mathematical Economics, Elsevier, vol. 23(1), pages 73-86, January. [Downloadable!] (restricted)
    Other versions:
  7. Samet, Dov, 1998. "Iterated Expectations and Common Priors," Games and Economic Behavior, Elsevier, vol. 24(1-2), pages 131-141, July. [Downloadable!] (restricted)
  8. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November. [Downloadable!] (restricted)
  9. Kalai, Ehud & Lehrer, Ehud, 1993. "Subjective Equilibrium in Repeated Games," Econometrica, Econometric Society, vol. 61(5), pages 1231-40, September. [Downloadable!] (restricted)
    Other versions:
  10. John Geanakoplos, 1989. "Game Theory Without Partitions, and Applications to Speculation and Consensus," Cowles Foundation Discussion Papers 914, Cowles Foundation, Yale University. [Downloadable!]
  11. Giacomo Bonanno & Klaus Nehring, 1999. "How to make sense of the common prior assumption under incomplete information," International Journal of Game Theory, Springer, vol. 28(3), pages 409-434. [Downloadable!] (restricted)
  12. Nau, Robert F. & McCardle, Kevin F., 1990. "Coherent behavior in noncooperative games," Journal of Economic Theory, Elsevier, vol. 50(2), pages 424-444, April. [Downloadable!] (restricted)
  13. Clark, Stephen A., 1993. "The valuation problem in arbitrage price theory," Journal of Mathematical Economics, Elsevier, vol. 22(5), pages 463-478. [Downloadable!] (restricted)
  14. Kalai, Ehud & Lehrer, Ehud, 1993. "Subjective Games and Equilibria," Working Papers 875, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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