Viable Insider Markets

Olfa Draouil and Bernt {\O}ksendal

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Abstract: We consider the problem of optimal inside portfolio $\pi(t)$ in a financial market with a corresponding wealth process $X(t)=X^{\pi}(t)$ modelled by \begin{align}\label{eq0.1} \begin{cases} dX(t)&=\pi(t)X(t)[\alpha(t)dt+\beta(t)dB(t)]; \quad t\in[0, T] X(0)&=x_0>0, \end{cases} \end{align} where $B(\cdot)$ is a Brownian motion. We assume that the insider at time $t$ has access to market information $\varepsilon_t>0$ units ahead of time, in addition to the history of the market up to time $t$. The problem is to find an insider portfolio $\pi^{*}$ which maximizes the expected logarithmic utility $J(\pi)$ of the terminal wealth, i.e. such that $$\sup_{\pi}J(\pi)= J(\pi^{*}), \text {where } J(\pi)= \mathbb{E}[\log(X^{\pi}(T))].$$ The insider market is called \emph{viable} if this value is finite. We study under what inside information flow $\mathbb{H}$ the insider market is viable or not. For example, assume that for all $t

Date: 2018-01
New Economics Papers: this item is included in nep-upt
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