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Rate of Arbitrage and Reconciled Beliefs

Author

Listed:
  • Marco Scarsini

    (Università di Torino)

  • Yossi Feinberg

    (Graduate School of Business, Stanford University)

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.

Suggested Citation

  • Marco Scarsini & Yossi Feinberg, 2003. "Rate of Arbitrage and Reconciled Beliefs," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-12.
    • Handle: RePEc:ebl:ecbull:eb-03d80003
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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