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A Mispricing Model of Stocks Under Asymmetric Information

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  • Winston Buckley
  • Garfield Brown
  • Mario Marshall

Abstract

We extend the theory of asymmetric information in mispricing models for stocks following geometric Brownian motion to constant relative risk averse investors. Mispricing follows a continuous mean--reverting Ornstein--Uhlenbeck process. Optimal portfolios and maximum expected log--linear utilities from terminal wealth for informed and uninformed investors are derived. We obtain analogous but more general results which nests those of Guasoni (2006) as a special case of the relative risk aversion approaching one.

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  • Winston Buckley & Garfield Brown & Mario Marshall, 2011. "A Mispricing Model of Stocks Under Asymmetric Information," Papers 1101.1148, arXiv.org.
    • Handle: RePEc:arx:papers:1101.1148
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    1. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
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