OPTIMAL TRADING STRATEGY WITH PARTIAL INFORMATION AND THE VALUE OF INFORMATION: THE SIMPLIFIED AND GENERALIZED MODELS

Zhaojun Yang and Chaoqun Ma ()
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Chaoqun Ma: International Business School of Hunan University, Changsha, 410082, P.R. China

International Journal of Theoretical and Applied Finance (IJTAF), 2001, vol. 04, issue 05, 759-772

Abstract: In this paper we deal with the optimization problem of maximizing the expected total utility from consumption under the case of partial information. By means of the martingale method and filter theory, we have acquired an explicit solution to optimal investment and consumption determined by the security prices for a special security price process. Furthermore, we establish a simple formula for valuing information, provided that the utility function is logarithmic. In the end, we extend most of the conclusions to a general situation where both the interest rate and dispersion coefficient of risk security follow some stochastic processes.

Keywords: Utility function; security price and its filtration; partial and full information; filter; trading strategy; Clark's formula; the value of information (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1142/S0219024901001231

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