Portfolio optimization with insider's initial information and counterparty risk

DOI10.1007/S00780-014-0246-7zbMATH Open1307.91163arXiv1208.5398OpenAlexW2112157587MaRDI QIDQ486930FDOQ486930

Authors: Caroline Hillairet, Ying Jiao 

Publication date: 19 January 2015

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: We study the gain of an insider having private information which concerns the default risk of a counterparty. More precisely, the default time au is modelled as the first time a stochastic process hits a random barrier L. The insider knows this barrier (as it can be the case for example for the manager of the counterparty), whereas standard investors only observe its value at the default time. All investors aim to maximize the expected utility from terminal wealth, on a financial market where the risky asset price is exposed to a sudden loss at the default time of the counterparty. In this framework, the insider's information is modelled by using an initial enlargement of filtration and au is a stopping time with respect to this enlarged filtration. We prove that the regulator must impose short selling constraints for the insider, in order to exclude the value process to reach infinity. We then solve the optimization problem and we study the gain of the insider, theoretically and numerically. In general, the insider achieves a larger value of expected utility than the standard investor. But in extreme situations for the default and loss risks, a standard investor may in average outperform the insider, by taking advantage of an aggressive short selling position which is not allowed for the insider, but at the risk of big losses if the default finally occurs after the maturity.

Full work available at URL: https://arxiv.org/abs/1208.5398

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zbMATH Keywords

dynamic programmingdualityasymmetric informationcounterparty riskoptimal investmentenlargement of filtrations

Mathematics Subject Classification ID

Dynamic programming (90C39) Portfolio theory (91G10) Credit risk (91G40) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

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Cited In (7)

• Expected utility maximization for an insurer with investment and risk control under inside information
• An Application of the Forward Integral to an Insider’s Optimal Portfolio with the Dividend
• Robust optimal investment and reinsurance for an insurer with inside information
• Optimal portfolio for an insider in a market driven by Lévy processes§
• Title not available (Why is that?)
• Information uncertainty related to marked random times and optimal investment
• Insider information and its relation with the arbitrage condition and the utility maximization problem

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