Optimal Utility with Some Additional Information (Q5707903)

The authors consider a utility optimization problem for continuous time financial markets in the presence of additional information. It is assumed that there are only two assets in the market: a bond (whose price is equal to 1 over the entire time horizon \([0,T]\)) and a risky asset the price process of which is satisfying a stochastic differential equation (SDE) of the form \[ dS_t=a(t,S_t,X_t)\,dt+ b(t,S_t)\, dW_1(t). \] Here, the drift \(a(t,S_t,X_t)\) depends on a stochastic factor \(X=(X_t)\) satisfying a SDE of the form \[ dX_t=A(t,X_t)dt+B(t,X_t)\,dW_2(t), \] where \(W_1, W_2\) are two independent Brownian motions. Three different types of additional information on \(X\) are considered: (i) at the beginning, an \({\mathcal F}^X_T\)-measurable random variable \(G\) is known; (ii) \(X_\tau\) is known (here, \(\tau\) is a (``market-known'') \(({\mathcal F}^S_t)\)-stopping time); (iii) an information disclosure \(X_\tau\) of the stochastic factor at the (``market-unknown'') time \(\tau\) (being an \(({\mathcal F}^X_t)\)-stopping time). In the case of a logarithmic utility, explicit formulas of optimal wealth and optimal strategies are obtained.