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A Mispricing Model of Stocks Under Asymmetric Information (1101.1148v1)
Published 6 Jan 2011 in q-fin.GN, q-fin.PM, and q-fin.PR
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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