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Information : Price And Impact On General Welfare And Optimal Investment. An Anticipative Stochastic Differential Game Model

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  • Ewald, Christian-Oliver
  • Xiao, Yajun

Abstract

We consider a continuous time market model, in which agents influence asset prices. The agents are assumed to be rational and maximizing expected utility from terminal wealth. They share the same utility function but are allowed to possess different levels of information. Technically our model represents a stochastic differential game with anticipative strategy sets. We derive necessary and sufficient criteria for the existence of Nash-equilibria and characterize them for various levels of information asymmetry. Furthermore we study in how far the asymmetry in the level of information influences Nash-equilibria and general welfare. We show that under certain conditions in a competitive environment an increased level of information may in fact lower the level of general welfare. This effect can not be observed in representative agent based models, where information always increases welfare. Finally we extend our model in a way, that we add prior stages, in which agents are allowed to buy and sell information from each other, before engaging in trading with the market assets. We determine equilibrium prices for particular pieces of information in this setup.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3301.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:3301

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Keywords: information; financial markets; stochastic differential games;

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  1. Arturo Kohatsu-Higa & Agnès Sulem, 2006. "Utility Maximization In An Insider Influenced Market," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 153-179.
  2. Bernt Øksendal, 2006. "A Universal Optimal Consumption Rate For An Insider," Mathematical Finance, Wiley Blackwell, vol. 16(1), pages 119-129.
  3. Christian-Oliver Ewald, 2005. "Optimal Logarithmic Utility And Optimal Portfolios For An Insider In A Stochastic Volatility Market," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 301-319.
  4. Peter Imkeller, 2003. "Malliavin's Calculus in Insider Models: Additional Utility and Free Lunches," Mathematical Finance, Wiley Blackwell, vol. 13(1), pages 153-169.
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