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Portfolio Optimization in Jump Model under Inefficiencies in the Market

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Document pages: 14 pages

Abstract: This paper evaluates the use of modeling approach that depends on Levyjump model to predict investors wealth under inefficiencies in the market, interms of mispricing and asymmetric information where the traded stock orrisky asset price is considered to be as a function of a Levy jump process (i.e.the driving Levy process has Brownian component) by specifying the assetprice process in the large filtration of informed investor. Then we obtain itsdynamics for uninformed investor using the Hitsuda representation of Gaussianprocesses assuming there are two distinct classes of rational investors. Inthis setting assuming power utility functions, the optimal portfolios, maximumexpected power utilities and asymptotic utilities for investors from theterminal wealth are derived by the methods of optimization and stochasticcalculus.

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