Insider information and its relation with the arbitrage condition and the utility maximization problem

Bernardo D'Auria and José Antonio Salmerón Garrido

DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística

Abstract: Within the well-known framework of financial portfolio optimization, we analyze the existing relationships between the condition of arbitrage and the utility maximization in presence of insider information. That is, we assume that, since the initial time, the information flow is altered by adding the knowledge of an additional random variable including future information. In this context we study the utility maximization problem under the logarithmic and the Constant Relative Risk Aversion (CRRA) utilities, with and without the restriction of no temporarybankruptcy. For the latter case we obtain an optimal strategy different from the one computed in [1]. We give various examples for which the insider information create arbitrage, and for which the logarithmic maximization problem is bounded or unbounded. We conclude with an interesting result, showing that the insider information may not lead to any arbitrage.

Keywords: Optimal; Portfolio; Enlargement; Of; Filtration; Value; Of; The; Information; Arbitrage; No; Free; Lunch; Vanishing; Risk; Equivalent; Martingale; Measure (search for similar items in EconPapers)
Date: 2019-09-12
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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