IFin Seminar, Peter Bank, TU Berlin "What if we knew what the future brings, even on short-term notice?"

Institute of Finance

Data: 25/11/2021 / 12:25 - 13:40

Speaker:  Peter Bank, TU Berlin

Title:        "What if we knew what the future brings, even on short-term notice?""

Time:        12:25 - 13:40

Room:       A 23 (red building)

Lugano Campus

 

ABSTRACT: The flow of information is one of the key drivers in financial markets. Motivated by different optimal investment problems we will present a survey of some new approaches to dealing with different forms of inside information. A first focus will be on an investor who knows a stocks price evolution some time in advance, but cannot freely take advantage of this arbitrage due to adverse price impact her trades have on execution prices. For exponential utility in a Bachelier model with linear temporary price impact, we show explicitly how the investor should best aggregate her inside information and trade it off against the market frictions. In a second case study, we consider Merton’s classical optimal investment problems with stock price jumps and an economic agent who gets a noisy signal about impending jumps. We compute optimal investment policies and show how they depend on the reliability of the short-term signal. The third and final example is an irreversible investment problem where jumps can be caused exogenously and endogenously by the control. Here timing issues arise which require a suitable relaxation of controls to allow for pro-active as well as reactive interventions just before and just after signaled exogenous jumps.