The Shannon information of filtrations and the additional logarithmic utility of insiders

DOI10.1214/009117905000000648zbMATH Open1098.60065arXivmath/0503013OpenAlexW2119509789MaRDI QIDQ2496964FDOQ2496964

Authors: Stefan Ankirchner, P. Imkeller, Steffen Dereich 

Publication date: 26 July 2006

Published in: The Annals of Probability (Search for Journal in Brave)

Abstract: The background for the general mathematical link between utility and information theory investigated in this paper is a simple financial market model with two kinds of small traders: less informed traders and insiders, whose extra information is represented by an enlargement of the other agents' filtration. The expected logarithmic utility increment, that is, the difference of the insider's and the less informed trader's expected logarithmic utility is described in terms of the information drift, that is, the drift one has to eliminate in order to perceive the price dynamics as a martingale from the insider's perspective. On the one hand, we describe the information drift in a very general setting by natural quantities expressing the probabilistic better informed view of the world. This, on the other hand, allows us to identify the additional utility by entropy related quantities known from information theory. In particular, in a complete market in which the insider has some fixed additional information during the entire trading interval, its utility increment can be represented by the Shannon information of his extra knowledge. For general markets, and in some particular examples, we provide estimates of maximal utility by information inequalities.

Full work available at URL: https://arxiv.org/abs/math/0503013

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zbMATH Keywords

entropyenlargement of filtrationutility maximizationdifferential entropyheterogeneous informationinformation differenceinsider model

Mathematics Subject Classification ID

Measures of information, entropy (94A17) Utility theory (91B16) Martingales with continuous parameter (60G44) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (39)

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• A bound on the financial value of information
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