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A mispricing model of stocks under asymmetric information |
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| Authors: | Winston S. Buckley Garfield O. Brown Mario Marshall |
| Affiliation: | 1. CBA, Florida International University, Miami, FL 33199, USA;2. Statistical Laboratory, CMS, Cambridge University, Cambridge CB3 0WB, UK;3. School of Management, University of Texas at Dallas, Richardson, TX 75080, USA |
| 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. |
| Keywords: | Finance Utility theory Investment analysis Optimization |
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