Title
The most exciting game
Author
Julio Backhoff-Veraguas
Author
Mathias Beiglböck
Abstract
Motivated by a problem posed by Aldous [2, 1] our goal is to find the maximal-entropy win-martingale: In a sports game between two teams, the chance the home team wins is initially x0∈(0,1) and finally 0 or 1. As an idealization we take a continuous time interval [0,1] and let Mt be the probability at time t that the home team wins. Mathematically, M=(Mt)t∈[0,1] is modelled as a continuous martingale. We consider the problem to find the most random martingale M of this type, where ‘most random’ is interpreted as a maximal entropy criterion. In discrete time this is equivalent to the minimization of relative entropy w.r.t. a Gaussian random walk. The continuous time analogue is that the max-entropy win-martingale M should minimize specific relative entropy with respect to Brownian motion in the sense of Gantert [20]. We use this to prove that M is characterized by the stochastic differential equation dMt=sin(πMt)π√1−tdBt. To derive the form of the optimizer we use a scaling argument together with a new first order condition for martingale optimal transport, which may be of interest in its own right.
Keywords
EntropyMartingale optimal transportmax-entropy win-martingaleprediction marketsspecific relative entropy
Object type
Language
English [eng]
Persistent identifier
https://phaidra.univie.ac.at/o:2081755
Appeared in
Title
Electronic Communications in Probability
Volume
29
ISSN
1083-589X
Issued
2024
Publisher
Institute of Mathematical Statistics
Date issued
2024
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