The financial value of knowing the distribution of stock prices in discrete market models

DOI10.2140/INVOLVE.2019.12.883MaRDI QIDQ2278607zbMATH OpenOpenAlexFDO

Authors Ayelet Amiran, Fabrice Baudoin, Skylyn Brock, Berend Coster, Ryan Craver, Ugonna Ezeaka, Phanuel Mariano, Mary Wishart

Publication date 5 December 2019

Published in Involve (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1808.03186

zbMATH Keywords

anticipationdiscrete market modelsfinancial value of weak informationinsider tradingmathematical financeportfolio optimization

Mathematics Subject Classification ID

Utility theory (91B16) Portfolio theory (91G10) Financial markets (91G15)

Abstract: An explicit formula is derived for the value of weak information in a discrete time model that works for a wide range of utility functions including the logarithmic and power utility. We assume a complete market with a finite number of assets and a finite number of possible outcomes. Explicit calculations are performed for a binomial model with two assets. The case of trinomial models is also discussed.

Review text

Much of the research into the financial value of information has been in a continuous context. This article explores the topic in a discrete setting. The authors consider the expected utility rather than expected wealth. They concentrate on three different utility functions: log, power, and exponential functions. A definition of the financial value of weak information is provided in terms of expected utility. Assuming a complete market, an expression for this measure is given as the main result of the article. The methodology is then exemplified in a binomial model of two assets.

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Cites work

• Martingale and Duality Methods for Utility Maximization in an Incomplete Market
• Maxmin expected utility with non-unique prior
• On utility maximization in discrete-time financial market models
• Relative risk aversion: what do we know?
• The financial value of a weak information on a financial market

Cited in

(4)

• The financial value of a weak information on a financial market
• The value of knowing that you do not know
• Obtaining distributional information from valuation lattices
• On the increment distributions of stock prices

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