English

The insider problem in the trinomial model: a discrete-time jump process approach

Probability 2024-07-16 v4 Mathematical Finance Portfolio Management

Abstract

In an incomplete market underpinned by the trinomial model, we consider two investors : an ordinary agent whose decisions are driven by public information and an insider who possesses from the beginning a surplus of information encoded through a random variable for which he or she knows the outcome. Through the definition of an auxiliary model based on a marked binomial process, we handle the trinomial model as a volatility one, and use the stochastic analysis and Malliavin calculus toolboxes available in that context. In particular, we connect the information drift, the drift to eliminate in order to preserve the martingale property within an initial enlargement of filtration in terms of the Malliavin derivative. We solve explicitly the agent and the insider expected logarithmic utility maximisation problems and provide a hedging formula for replicable claims. We identify the insider expected additional utility with the Shannon entropy of the extra information, and examine then the existence of arbitrage opportunities for the insider.

Keywords

Cite

@article{arxiv.2106.15208,
  title  = {The insider problem in the trinomial model: a discrete-time jump process approach},
  author = {Hélène Halconruy},
  journal= {arXiv preprint arXiv:2106.15208},
  year   = {2024}
}

Comments

38 pages. Comments are welecome!

R2 v1 2026-06-24T03:42:23.113Z