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A market model with medium/long-term effects due to an insider

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  • Hiroaki Hata
  • Arturo Kohatsu-Higa

Abstract

In this article, we consider a modification of the Karatzas--Pikovsky model of insider trading. Specifically, we suppose that the insider agent influences the long/medium-term evolution of Black--Scholes type model through the drift of the stochastic differential equation. We say that the insider agent is using a portfolio leading to a partial equilibrium if the following three properties are satisfied: (a) the portfolio used by the insider leads to a stock price which is a semimartingale under his/her own filtration and his/her own filtration enlarged with the final price; (b) the portfolio used by the insider is optimal in the sense that it maximises the logarithmic utility for the insider when his/her filtration is fixed; and (c) the optimal logarithmic utility in (b) is finite. We give sufficient conditions for the existence of a partial equilibrium and show in some explicit models how to apply these general results.

Suggested Citation

  • Hiroaki Hata & Arturo Kohatsu-Higa, 2013. "A market model with medium/long-term effects due to an insider," Quantitative Finance, Taylor & Francis Journals, vol. 13(3), pages 421-437, February.
    • Handle: RePEc:taf:quantf:v:13:y:2013:i:3:p:421-437
    DOI: 10.1080/14697688.2012.695084
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    Cited by:

    1. Fenge Chen & Bing Li & Xingchun Peng, 2022. "Portfolio Selection and Risk Control for an Insurer With Uncertain Time Horizon and Partial Information in an Anticipating Environment," Methodology and Computing in Applied Probability, Springer, vol. 24(2), pages 635-659, June.

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