Martingale representation theorems for initially enlarged filtrations. (Q1877525)

A filtration generated on a probability space \(( \Omega , {\mathcal F} , P)\) by a \(d\)-dimensional security price process \(S\) on a finite horizon \([0,T]\), is enlarged at time zero by an additional \(\sigma \)-algebra generated by a variable \(G\) with values in a Polish space. The distribution of \(G\) conditioned on the initial filtration is assumed to possess a càdlàg regular version. Then there exists a martingale preserving probability on the space with the enlarged filtration, with a decoupling property with respect to \({\mathcal F}_{T}\) and \(G\). The process \(S\) is further assumed to be a continuous semimartingale under the initial filtration and to generate an arbitrage-free (complete market) price system. Then, a martingale representation theorem for the enlarged filtration is proved. The results are applied to the problem of an insider investor (i.e. whose information is defined by the enlarged filtration) choosing a trading strategy to maximize the joint utility of consumption and terminal wealth. The proved existence of optimal consumption and investment path generalizes similar results obtained in earlier literature for the special case of Brownian price processes.