Random times at which insiders can have free lunches

Peter Imkeller

No 2001,62, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: We consider models of time continuous financial markets with a regular trader and an insider who are able to invest into one risky asset. The insider's additional knowledge consists in his ability to stop a random time which is inaccessible to the regular trader, such as the last passage of a certain level before maturity by some stock price process, or the time at which the stock price reaches its maximum during the trading interval. We show that under very mild assumptions on the coefficients of the diffusion process describing these price processes the information drift caused by the additional knowledge of the insider cannot be eliminated by an equivalent change of probability measure. As a consequence, all our models allow the insider to have free lunches with vanishing risk, or even to exercise arbitrage.

Keywords: Brownian motion; diffusion; free lunch; arbitrage; financial markets; insider; progressive enlargement of filtrations; honest time (search for similar items in EconPapers)
Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb373:200162

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