Portfolio selection and asset pricing under asymmetric information

Abstract

In this dissertation, there are two main topics: optimal portfolio selection problem with constraints and asset pricing under asymmetric information. The portfolio selection problem is a utility maximization problem which plays an important role to get an equilibrium price. The intertemporal consumption and portfolio selection problems with constraints are considered in a continuous time. For the general utility function, subsistence constraints which represent the least living cost and liquidity constraints which prevent borrowing against future income are investigated with and without retirement option. The closed-form solutions and explicit optimal policies are obtained and we analyze our results for the special utility function, CRRA utility function. In the second chapter, continuous market microstructure models in which there exist three types of traders (an insider, market makers, and liquidity traders) are introduced. Two main considerations are risk averseness of the market participants and competition between market makers. When the market makers are competitive, not only the value functions for the insider but also the market depth is obtained explicitly. The risk averseness of the insider leads to the time varying market depth. In the case of oligopolistic market makers, however, the market depth depends on the behavior of market makers. Furthermore some part of the excess volatility can be explained by the oligopolistic market makers.