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Mathematics > Numerical Analysis

arXiv:2207.03738 (math)
[Submitted on 8 Jul 2022]

Title:Malliavin calculus and its application to robust optimal portfolio for an insider

Authors:Chao Yu, Yuhan Cheng
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Abstract:Insider information and model uncertainty are two unavoidable problems for the portfolio selection theory in reality. This paper studies the robust optimal portfolio strategy for an investor who owns general insider information under model uncertainty. On the aspect of the mathematical theory, we improve some properties of the forward integral and use Malliavin calculus to derive the anticipating Itô formula . Then we use forward integrals to formulate the insider-trading problem with model uncertainty. We give the half characterization of the robust optimal portfolio and obtain the semimartingale decomposition of the driving noise $W$ with respect to the insider information filtration, which turns the problem turns to the nonanticipative stochastic differential game problem. We give the total characterization by the stochastic maximum principle. When considering two typical situations where the insider is `small' and `large', we give the corresponding BSDEs to characterize the robust optimal portfolio strategy, and derive the closed form of the portfolio and the value function in the case of the small insider by the Donsker $\delta$ functional. We present the simulation result and give the economic analysis of optimal strategies under different situations.
Subjects: Numerical Analysis (math.NA)
Cite as: arXiv:2207.03738 [math.NA]
  (or arXiv:2207.03738v1 [math.NA] for this version)
  https://doi.org/10.48550/arXiv.2207.03738

Submission history

From: Chao Yu [view email]
[v1] Fri, 8 Jul 2022 08:15:36 UTC (90 KB)
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