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Weak Insider Trading and Behavioral Finance

Campi, Luciano; Del Vigna, Matteo (2012), Weak Insider Trading and Behavioral Finance, SIAM Journal on Financial Mathematics, 3, 1, p. 242-279. http://dx.doi.org/10.1137/110824693

Type
Article accepté pour publication ou publié
External document link
http://hal.archives-ouvertes.fr/hal-00566185/fr/
Date
2012
Journal name
SIAM Journal on Financial Mathematics
Volume
3
Number
1
Publisher
SIAM
Pages
242-279
Publication identifier
http://dx.doi.org/10.1137/110824693
Metadata
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Author(s)
Campi, Luciano
Del Vigna, Matteo
Abstract (EN)
In this paper, we study the optimal portfolio selection problem of weakly informed traders in the sense of Baudoin \cite{Baudoin_2002}. Instead of considering only expected utility maximizers, we also take into consideration different preference paradigms. In particular, we analyze a representative agent who follows the tenets of cumulative prospect theory as developed by Kahneman and Tversky \cite{Kahneman_Tversky_1992}, together with an investor acting as in Yaari's dual theory of choice \cite{Yaari_1987} and a trader who faces the so-called goal reaching maximizer. For everyone of these different maximizers, we frame the corresponding optimization problems, one in the non-informed case and the other one when the agent possesses a weak information. At last, comparison results among different types of investor and differently informed investor are given, together with explicit examples. Specifically, the insider's gain, or the difference between the optimal values of an informed and a non informed investor, is explicitly evaluated.
Subjects / Keywords
probability distorsion; goal reaching maximizer; weak information; insider trading; behavioral finance; Yaari’s dual theory of choice; loss aversion
JEL
G11 - Portfolio Choice; Investment Decisions
D82 - Asymmetric and Private Information; Mechanism Design
D81 - Criteria for Decision-Making under Risk and Uncertainty

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