UTILITY MAXIMIZATION IN AN INSIDER INFLUENCED MARKET

Arturo Kohatsu‐Higa and Agnès Sulem

Mathematical Finance, 2006, vol. 16, issue 1, 153-179

Abstract: We study a controlled stochastic system whose state is described by a stochastic differential equation with anticipating coefficients. This setting is used to model markets where insiders have some influence on the dynamics of prices. We give a characterization theorem for the optimal logarithmic portfolio of an investor with a different information flow from that of the insider. We provide explicit results in the partial information case that we extend in order to incorporate the enlargement of filtration techniques for markets with insiders. Finally, we consider a market with an insider who influences the drift of the underlying price asset process. This example gives a situation where it makes a difference for a small agent to acknowledge the existence of an insider in the market.

Date: 2006
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