Rate of Arbitrage and Reconciled Beliefs

Marco Scarsini and Yossi Feinberg ()
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Yossi Feinberg: Graduate School of Business, Stanford University

Economics Bulletin, 2003, vol. 4, issue 11, 1-12

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-codes: D7 D8 (search for similar items in EconPapers)
Date: 2003-03-06
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Working Paper: Rate of arbitrage and reconciled beliefs (2003)
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