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A discontinuous mispricing model under asymmetric information

Winston S. Buckley and Hongwei Long

European Journal of Operational Research, 2015, vol. 243, issue 3, pages 944-955

Abstract: We study a discontinuous mispricing model of a risky asset under asymmetric information where jumps in the asset price and mispricing are modelled by Lévy processes. By contracting the filtration of the informed investor, we obtain optimal portfolios and maximum expected utilities for the informed and uninformed investors. We also discuss their asymptotic properties, which can be estimated using the instantaneous centralized moments of return. We find that optimal and asymptotic utilities are increased due to jumps in mispricing for the uninformed investor but the informed investor still has excess utility, provided there is not too little or too much mispricing.

Keywords: Mispricing; Levy jumps; Asymmetric information; Optimal portfolio; Expected utility (search for similar items in EconPapers)
Date: 2015
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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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