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The value of informational arbitrage

Author

Listed:
  • Huy N. Chau

    (Osaka University)

  • Andrea Cosso

    (University of Bologna)

  • Claudio Fontana

    (University of Padova)

Abstract

In the context of a general semimartingale model, we aim at determining how much an investor is willing to pay to learn additional information that allows achieving arbitrage. If such a value exists, we call it the value of informational arbitrage. We are interested in the case where the information yields arbitrage opportunities but not unbounded profits with bounded risk. As in Amendinger et al. (Finance Stoch. 7:29–46, 2003), we rely on an indifference valuation approach and study optimal consumption–investment problems under initial information and arbitrage. We establish some new results on models with additional information and characterise when the value of informational arbitrage is universal.

Suggested Citation

  • Huy N. Chau & Andrea Cosso & Claudio Fontana, 2020. "The value of informational arbitrage," Finance and Stochastics, Springer, vol. 24(2), pages 277-307, April.
    • Handle: RePEc:spr:finsto:v:24:y:2020:i:2:d:10.1007_s00780-020-00418-3
    DOI: 10.1007/s00780-020-00418-3
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    References listed on IDEAS

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    1. Albina Danilova & Michael Monoyios & Andrew Ng, 2009. "Optimal investment with inside information and parameter uncertainty," Papers 0911.3117, arXiv.org, revised Feb 2010.
    2. Acciaio, Beatrice & Fontana, Claudio & Kardaras, Constantinos, 2016. "Arbitrage of the first kind and filtration enlargements in semimartingale financial models," Stochastic Processes and their Applications, Elsevier, vol. 126(6), pages 1761-1784.
    3. Acciaio, Beatrice & Fontana, Claudio & Kardaras, Constantinos, 2016. "Arbitrage of the first kind and filtration enlargements in semimartingale financial models," LSE Research Online Documents on Economics 65150, London School of Economics and Political Science, LSE Library.
    4. Axel Grorud & Monique Pontier, 1998. "Insider Trading in a Continuous Time Market Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 331-347.
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    7. Fontana, Claudio, 2018. "The strong predictable representation property in initially enlarged filtrations under the density hypothesis," Stochastic Processes and their Applications, Elsevier, vol. 128(3), pages 1007-1033.
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    More about this item

    Keywords

    Value of information; Enlargement of filtration; Arbitrage; Indifference price; Martingale representation;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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