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A Mispricing Model of Stocks Under Asymmetric Information

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  • Winston Buckley
  • Garfield Brown
  • Mario Marshall
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    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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    File URL: http://arxiv.org/pdf/1101.1148
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1101.1148.

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    Date of creation: Jan 2011
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    Handle: RePEc:arx:papers:1101.1148

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    Web page: http://arxiv.org/

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    1. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
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