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Arbitrage and Risk Arbitrage

In: The Adventures of a Modern Renaissance Academic in Investing and Gambling

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  • William T Ziemba

Abstract

Arbitrage is when you construct a sure bet so that no matter the outcome, you either break even or turn a profit. Most observers say that arbitrage does not exist but actually it does in many instances because there are different financial markets for the same sports betting or financial security situation. This is because different people have different sets of information and beliefs. Lets take the simplest case: either A or B wins. Let, Oah be the British odds given on the event that A wins from betting source h and Obi that for B winning from betting source i. With these UK odds, the odds are the total return per 1 unit bet. In comparison, US odds are UK odds −1 and their payoffs are US odds +1 = UK odds…

Suggested Citation

  • William T Ziemba, 2017. "Arbitrage and Risk Arbitrage," World Scientific Book Chapters, in: The Adventures of a Modern Renaissance Academic in Investing and Gambling, chapter 15, pages 159-164, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813148529_0015
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    More about this item

    Keywords

    Financial History; Risk Management; Investment Strategies; Mean Reversion; Risk Arbitrage; Management of Assets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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