Survey_KP_2018

Abstract

In the baseline model we consider an economy with a continuum of risky assets N, available in zero net supply, and a safe asset that for simplicity is assumed to pay zero interest. All assets are traded competitively by a unit mass of deep-pocket rational investors and by noise traders. Some of the rational investors have private information about a set of mispriced assets, which they can exploit. We refer to these investors as arbitrageurs. Initially, we consider the case of a single arbitrageur. The arbitrageur has two interrelated decisions to take: portfolio choice and advertising. To find his optimal strategy, we proceed in three steps. First, we analyze his investment in advertised assets at t = 0, taking his decision to advertise them as given. Second, we find his optimal advertising decision, by identifying the assets that he advertises at t = 1 conditional on his portfolio. Finally, we characterize his optimal portfolio under optimal advertising.