How does insider knowledge impact financial strategies in volatile markets? This research delves into the financial strategies employed by an insider trader operating within a discontinuous time market. The market's price fluctuations are modeled using both Brownian motion and a compound Poisson process, allowing for a comprehensive analysis of its dynamics. This study compares insider strategies with those of non-informed traders, aiming to quantify the advantage conferred by private information. By leveraging the enlargement of filtrations, the authors analyze how an insider can optimally exploit their anticipatory knowledge. Assuming the market is viable and complete, the study provides an explicit expression for the insider's optimal portfolio, revealing how they strategically allocate assets to maximize profits. This rigorous mathematical framework offers a valuable benchmark for understanding information asymmetry in finance. These findings contribute to a deeper understanding of market efficiency and the potential for informed traders to outperform their uninformed counterparts. This study holds relevance for market regulators, financial institutions, and investors seeking to better assess the implications of information asymmetry and optimize investment decisions in complex financial environments.
This paper, published in the International Journal of Theoretical and Applied Finance, fits perfectly with the journal's scope due to its investigation of financial markets and trading strategies using theoretical models. By analyzing the impact of asymmetric information on optimal portfolios, the research contributes to the understanding of financial market dynamics.