ADDITIONAL LOGARITHMIC UTILITY OF AN INSIDER

In this paper, we consider a security market in which two investors on different information levels maximize their expected logarithmic util ity from terminal wealth, While the ordinary investor's portfolio deci sions are based on a public information flow, the insider possesses fr om the beginning extra information about the outcome of some random va riable G, e.g., the future price of a stock. We solve the two optimiza tion problems explicitly and rewrite the insider's additional expected logarithmic utility in terms of a relative entropy. This allows us to provide simple conditions on G for the finiteness of this additional utility and to show that it is basically given by the entropy of G. (C ) 1998 Elsevier Science B.V. All rights reserved.