A monetary value for initial information in portfolio optimization

Martin Schweizer (), Dirk Becherer () and Jürgen Amendinger ()
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Martin Schweizer: LMU München, Mathematisches Institut, Theresienstraße 39, 80333 München, Germany Manuscript
Dirk Becherer: Department of Mathematics, Imperial College, 180 Queen's Gate, London SW7 2BZ, UK
Jürgen Amendinger: HypoVereinsbank AG, International Markets, Equity Linked Products, Arabellastr. 12, 81925 München, Germany

Finance and Stochastics, 2003, vol. 7, issue 1, 29-46

Abstract: We consider an investor maximizing his expected utility from terminal wealth with portfolio decisions based on the available information flow. This investor faces the opportunity to acquire some additional initial information ${\cal G}$. His subjective fair value of this information is defined as the amount of money that he can pay for ${\cal G}$ such that this cost is balanced out by the informational advantage in terms of maximal expected utility. We study this value for common utility functions in the setting of a complete market modeled by general semimartingales. The main tools are a martingale preserving change of measure and martingale representation results for initially enlarged filtrations.

Keywords: Initial enlargement of filtrations; utility maximization; value of information; martingale preserving measure; predictable representation property (search for similar items in EconPapers)
JEL-codes: G10 G19 (search for similar items in EconPapers)
Date: 2002-11-13
Note: received: September 2001; final version received: March 2002
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Citations: View citations in EconPapers (2)

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