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Rate of arbitrage and reconciled beliefs

Author

Listed:
  • Marco Scarsini

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, Dipartimento di Scienze Economiche e Aziendali - LUISS - Libera Università Internazionale degli Studi Sociali Guido Carli [Roma])

  • Yossi Feinberg

    (MEDS, Northwestern University - Northwestern University [Evanston])

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," Post-Print hal-00539814, HAL.
    • Handle: RePEc:hal:journl:hal-00539814
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Subjective probability; Dutch book; betting system; zero-sum game; arbitrage; inconsistent beliefs.; inconsistent beliefs;
    All these keywords.

    JEL classification:

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

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