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A mispricing model of stocks under asymmetric information

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  • Buckley, Winston S.
  • Brown, Garfield O.
  • Marshall, Mario

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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  • Buckley, Winston S. & Brown, Garfield O. & Marshall, Mario, 2012. "A mispricing model of stocks under asymmetric information," European Journal of Operational Research, Elsevier, vol. 221(3), pages 584-592.
    • Handle: RePEc:eee:ejores:v:221:y:2012:i:3:p:584-592
    DOI: 10.1016/j.ejor.2012.03.026
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    Cited by:

    1. Buckley, Winston & Long, Hongwei & Marshall, Mario, 2016. "Numerical approximations of optimal portfolios in mispriced asymmetric Lévy markets," European Journal of Operational Research, Elsevier, vol. 252(2), pages 676-686.
    2. Xiang, Yun & He, Jiaxuan, 2022. "Pairs trading and asset pricing," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    3. Restocchi, Valerio & McGroarty, Frank & Gerding, Enrico & Johnson, Johnnie E.V., 2018. "It takes all sorts: A heterogeneous agent explanation for prediction market mispricing," European Journal of Operational Research, Elsevier, vol. 270(2), pages 556-569.
    4. Feghhi Kashani , Mohammad & Mohebimajd , Ahmadreza, 2021. "Outperformance Testing of a Dynamic Assets Portfolio Selection Supplemented with a Continuous Paths Levy Process," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 16(2), pages 253-282, June.
    5. Bernardo D'Auria & Jos'e Antonio Salmer'on, 2017. "Valuing the anticipative information on the stochastic short interest rates," Papers 1711.03642, arXiv.org, revised Nov 2021.
    6. Buckley, Winston & Long, Hongwei & Perera, Sandun, 2014. "A jump model for fads in asset prices under asymmetric information," European Journal of Operational Research, Elsevier, vol. 236(1), pages 200-208.
    7. Buckley, Winston S. & Long, Hongwei, 2015. "A discontinuous mispricing model under asymmetric information," European Journal of Operational Research, Elsevier, vol. 243(3), pages 944-955.
    8. Winston Buckley & Sandun Perera, 2019. "Optimal demand in a mispriced asymmetric Carr–Geman–Madan–Yor (CGMY) economy," Annals of Finance, Springer, vol. 15(3), pages 337-368, September.

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