Additional logarithmic utility of an insider

Jürgen Amendinger, Peter Imkeller and Martin Schweizer

Stochastic Processes and their Applications, 1998, vol. 75, issue 2, 263-286

Abstract: In this paper, we consider a security market in which two investors on different information levels maximize their expected logarithmic utility from terminal wealth. While the ordinary investor's portfolio decisions are based on a public information flow, the insider possesses from the beginning extra information about the outcome of some random variable G, e.g., the future price of a stock. We solve the two optimization problems explicitly and rewrite the insider's additional expected logarithmic utility in terms of a relative entropy. This allows us to provide simple conditions on G for the finiteness of this additional utility and to show that it is basically given by the entropy of G.

Keywords: Utility; maximization; Insider; trading; Initial; enlargement; of; filtrations; Relative; entropy; Entropy (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (77)

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