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Annals of Finance

, Volume 15, Issue 3, pp 337–368 | Cite as

Optimal demand in a mispriced asymmetric Carr–Geman–Madan–Yor (CGMY) economy

  • Winston Buckley
  • Sandun PereraEmail author
Research Article
  • 67 Downloads

Abstract

We employ a simple numerical scheme to compute optimal portfolios and utilities of informed and uninformed investors in a mispriced Carr–Geman–Madan–Yor (CGMY) Lévy market under information asymmetry using instantaneous centralized moments of returns (ICMR). We also investigate the impact on investors’ demand for stocks and indices at different levels of asymmetric information, mispricing, investment horizon, jump intensity, and volatility. Our simulations not only confirm that uninformed expected demand falls as information asymmetry increases but also offer strong evidence that informed expected demand behaves in a similar manner. In particular, expected demand of informed investors falls whenever information asymmetry exceeds 50%. The investor that demands more of the risky asset maintains that position over the entire investment horizon at each level of mispricing and information asymmetry. The absolute difference in expected demand between the uninformed and informed investors increases with the investment horizon, but decreases with the level of information asymmetry.

Keywords

Carr–Geman–Madan–Yor (CGMY)markets Mispricing models under asymmetric information Optimal portfolio Instantaneous centralized moments of returns (ICMR) 

JEL Classification

G10 G11 

Notes

Acknowledgements

The authors thank the editor, professor Anne Villamil for her contribution and the anonymous reviewer for his/her helpful comments and suggestions.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Mathematical SciencesBentley UniversityWalthamUSA
  2. 2.School of ManagementUniversity of Michigan-FlintFlintUSA

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