A Mispricing Model of Stocks Under Asymmetric Information

TL;DR

This paper develops a stock mispricing model incorporating asymmetric information, where mispricing follows a mean-reverting process, and derives optimal investment strategies for investors with different information levels and risk preferences.

Contribution

It extends existing mispricing models to include constant relative risk aversion and provides more general solutions that encompass previous models as special cases.

Findings

Mispricing modeled as an Ornstein-Uhlenbeck process.

Derived optimal portfolios for informed and uninformed investors.

Results generalize previous models, including Guasoni (2006).

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.