The link between asymmetric and symmetric optimal portfolios in fads models

Winston S. Buckley, Hongwei Long, Sandun Perera

Abstract


We study a financial market where asymmetric information, mispricing and jumps exist, and link the random optimal portfolios of informed and uninformed investors to the deterministic optimal portfolio of the symmetric market, where no mispricing exists. In particular, we show that under quadratic approximation, the expectation of the random optimal portfolio in the asymmetric market is equal to the optimal deterministic portfolio in the symmetric market. We also compute variance bounds of the optimal portfolios for investors having logarithmic preferences, and prove that the variance of optimal portfolios are bounded above by a simple function of the mean–reversion speed, level of mispricing, and the variance of the continuous component of the return process of the asset.

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Published: 2015-07-09

How to Cite this Article:

Winston S. Buckley, Hongwei Long, Sandun Perera, The link between asymmetric and symmetric optimal portfolios in fads models, Math. Finance Lett., 2015 (2015), Article ID 6

Copyright © 2015 Winston S. Buckley, Hongwei Long, Sandun Perera. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Mathematical Finance Letters

ISSN 2051-2929

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