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Optimal demand in a mispriced asymmetric Carr–Geman–Madan–Yor (CGMY) economy

Author

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  • Winston Buckley

    (Bentley University)

  • Sandun Perera

    (University of Michigan-Flint)

Abstract

We employ a simple numerical scheme to compute optimal portfolios and utilities of informed and uninformed investors in a mispriced Carr–Geman–Madan–Yor (CGMY) Lévy market under information asymmetry using instantaneous centralized moments of returns (ICMR). We also investigate the impact on investors’ demand for stocks and indices at different levels of asymmetric information, mispricing, investment horizon, jump intensity, and volatility. Our simulations not only confirm that uninformed expected demand falls as information asymmetry increases but also offer strong evidence that informed expected demand behaves in a similar manner. In particular, expected demand of informed investors falls whenever information asymmetry exceeds 50%. The investor that demands more of the risky asset maintains that position over the entire investment horizon at each level of mispricing and information asymmetry. The absolute difference in expected demand between the uninformed and informed investors increases with the investment horizon, but decreases with the level of information asymmetry.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:annfin:v:15:y:2019:i:3:d:10.1007_s10436-018-0335-2
    DOI: 10.1007/s10436-018-0335-2
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    More about this item

    Keywords

    Carr–Geman–Madan–Yor (CGMY)markets; Mispricing models under asymmetric information; Optimal portfolio; Instantaneous centralized moments of returns (ICMR);
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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