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A discontinuous mispricing model under asymmetric information

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  • Buckley, Winston S.
  • Long, Hongwei

Abstract

We study a discontinuous mispricing model of a risky asset under asymmetric information where jumps in the asset price and mispricing are modelled by Lévy processes. By contracting the filtration of the informed investor, we obtain optimal portfolios and maximum expected utilities for the informed and uninformed investors. We also discuss their asymptotic properties, which can be estimated using the instantaneous centralized moments of return. We find that optimal and asymptotic utilities are increased due to jumps in mispricing for the uninformed investor but the informed investor still has excess utility, provided there is not too little or too much mispricing.

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  • Buckley, Winston S. & Long, Hongwei, 2015. "A discontinuous mispricing model under asymmetric information," European Journal of Operational Research, Elsevier, vol. 243(3), pages 944-955.
    • Handle: RePEc:eee:ejores:v:243:y:2015:i:3:p:944-955
    DOI: 10.1016/j.ejor.2014.12.045
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    1. Buckley, Winston & Long, Hongwei & Marshall, Mario, 2016. "Numerical approximations of optimal portfolios in mispriced asymmetric Lévy markets," European Journal of Operational Research, Elsevier, vol. 252(2), pages 676-686.
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    3. Restocchi, Valerio & McGroarty, Frank & Gerding, Enrico & Johnson, Johnnie E.V., 2018. "It takes all sorts: A heterogeneous agent explanation for prediction market mispricing," European Journal of Operational Research, Elsevier, vol. 270(2), pages 556-569.
    4. Alexandre Ripamonti & Raphael Videira & Denis Ichimura, 2020. "Asymmetric information and daily stock prices in Brazil," Estudios Gerenciales, Universidad Icesi, vol. 36(157), pages 465-472, December.
    5. Winston Buckley & Sandun Perera, 2019. "Optimal demand in a mispriced asymmetric Carr–Geman–Madan–Yor (CGMY) economy," Annals of Finance, Springer, vol. 15(3), pages 337-368, September.

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