The value of knowing the market price of risk

Katia Colaneri, Stefano Herzel and Marco Nicolosi

Papers from arXiv.org

Abstract: This paper presents an optimal allocation problem in a financial market with one risk-free and one risky asset, when the market is driven by a stochastic market price of risk. We solve the problem in continuous time, for an investor with a Constant Relative Risk Aversion (CRRA) utility, under two scenarios: when the market price of risk is observable (the {\em full information case}), and when it is not (the {\em partial information case}). The corresponding market models are complete in the partial information case and incomplete in the other case, hence the two scenarios exhibit rather different features. We study how the access to more accurate information on the market price of risk affects the optimal strategies and we determine the maximal price that the investor would be willing to pay to get such information. In particular, we examine two cases of additional information, when an exact observation of the market price of risk is available either at time $0$ only (the {\em initial information case}), or during the whole investment period (the {\em dynamic information case}).

Date: 2019-09, Revised 2019-09
New Economics Papers: this item is included in nep-rmg and nep-upt
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Citations: View citations in EconPapers (1)

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Journal Article: The value of knowing the market price of risk (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1909.07837

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