Short communication: Chances for the honest in honest versus insider trading

DOI10.1137/21M1439547MaRDI QIDQ5080125zbMATH OpenOpenAlexFDO

Authors

Publication date 31 May 2022

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2106.10033

zbMATH Keywords

anticipating calculusforward integralinsider tradingportfolio optimization

Mathematics Subject Classification ID

Applications of stochastic analysis (to PDEs, etc.) (60H30) Portfolio theory (91G10) Financial markets (91G15)

Abstract: We study a Black-Scholes market with a finite time horizon and two investors: an honest and an insider trader. We analyze it with anticipating stochastic calculus in two steps. First, we recover the classical result on portfolio optimization that shows that the expected logarithmic utility of the insider is strictly greater than that of the honest trader. Then, we prove that, whenever the market is viable, the honest trader can get a higher logarithmic utility, and therefore more wealth, than the insider with a strictly positive probability. Our proof relies on the analysis of a sort of forward integral variant of the Dol'eans-Dade exponential process. The main financial conclusion is that the logarithmic utility is perhaps too conservative for some insiders.

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Cited in

(5)

• Studying anticipation on financial markets by BSDE
• A simple comparison between Skorokhod \& Russo-Vallois integration for insider trading
• Insiders and Their Free Lunches: The Role of Short Positions
• Performance enhancement through portfolio optimization of delayed insider information: an analysis and implementation study
• Optimal investment with insider information using Skorokhod \& Russo-Vallois integration

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