Dynamic portfolio choice with information-processing constraints and finite investment horizon

Xiaoqing Yin and Haijun Wang

Economics Letters, 2025, vol. 251, issue C

Abstract: This paper explores how information-processing constraints affect an investor’s dynamic portfolio choice with finite investment horizon. With the given information channel capacity, we give a closed-form solution. We find that the risky portfolio share increases with the information channel capacity and fast converges to its true mean. In the case of endogenous channel capacity, we give an approximate solution. Due to the information cost, the optimal channel capacity decreases with time and the risky portfolio share is convex in time for a long investment horizon.

Keywords: Portfolio choice; Finite investment horizon; Information-processing constraints; Channel capacity (search for similar items in EconPapers)
JEL-codes: C61 D83 G11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:251:y:2025:i:c:s0165176525001557

DOI: 10.1016/j.econlet.2025.112318

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