Does the Market Anticipate? Can it? Should it?

Paper: arXiv 2603.02187

Authors: Kangda Ken Wren

Abstract

We explore a nuance to ’no arbitrage’ in relation to ‘information efficiency’: acting immediately on an arbitrage is sometimes suboptimal; in such cases optimised trading can suppress the anticipation of predictable risk-outcomes, thereby creating an apparent Status Quo Bias, with Momentum and Low-Risk effects. This is shown in continuous time under model- or event-risk, where, unlike existing approaches, we allow pre-horizon risk-resolution and Risk-Neutral Equivalent pricing, with the technical challenges overcome through results from the ‘weak viability’ and ‘side/inside information’ literature. Thus the tension between ’no arbitrage’, ‘information efficiency’ and ‘risk-anticipation’ is exposed and treated in a practically relevant setting.

Complexity vs Empirical Score

• Math Complexity: 8.0/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a highly rigorous theoretical framework in continuous-time financial mathematics, leveraging concepts from weak viability and side/inside information literature. However, it is entirely theoretical with no empirical backtesting, code provided, or real-world data validation.

Research Flowchart

  flowchart TD
    A[Research Goal: Resolve tension between No Arbitrage, Info Efficiency, and Risk-Anticipation] --> B[Inputs: Continuous-time framework with Model/Event Risk & Side/Inside Info]
    B --> C[Methodology: Apply Weak Viability & Risk-Neutral Equivalent Pricing with pre-horizon resolution]
    C --> D[Computational Process: Model optimized trading strategies vs. immediate arbitrage execution]
    D --> E[Finding 1: Acting immediately on arbitrage is sometimes suboptimal]
    D --> F[Finding 2: Optimized trading suppresses risk-anticipation, generating Status Quo Bias, Momentum & Low-Risk effects]