Does the Market Anticipate? Can it? Should it?

Abstract: We explore a nuance to 'no arbitrage' in relation to 'informational 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, pre-horizon risk-resolution and Risk-Neutral Equivalent pricing are allowed, with the technical challenges overcome through results from the 'weak viability' and 'side-inside information' literature. The 'tension' between 'no arbitrage', 'informational efficiency' and 'risk-anticipation' is thus exposed and treated in a practically relevant setting.