Optimal information acquisition for eliminating estimation risk

Zongxia Liang and Qi Ye

Papers from arXiv.org

Abstract: This paper diverges from previous literature by considering the utility maximization problem in the context of investors having the freedom to actively acquire additional information to mitigate estimation risk. We derive closed-form value functions using CARA and CRRA utility functions and establish a criterion for valuing extra information through certainty equivalence, while also formulating its associated acquisition cost. By strategically employing variational methods, we explore the optimal acquisition of information, taking into account the trade-off between its value and cost. Our findings indicate that acquiring earlier information holds greater worth in eliminating estimation risk and achieving higher utility. Furthermore, we observe that investors with lower risk aversion are more inclined to pursue information acquisition.

Date: 2024-05
New Economics Papers: this item is included in nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2405.09339 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2405.09339

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().