Reciprocal Specific Relative Entropy between Continuous Martingales

Abstract

We introduce a novel notion of divergence between continuous martingales; the reciprocal specific relative entropy. First, we motivate this definition from multiple perspectives. Thereafter, we solve the reciprocal specific relative entropy minimization problem over the set of win-martingales (used as models for prediction markets Aldous (2013)). Surprisingly, we show that the optimizer is the renowned neutral Wright-Fisher diffusion. We also justify that this diffusion is in a sense the most salient win-martingale, since it is uniquely selected when we suitably perturb the degenerate martingale optimal transport problem of variance minimization.