The Value of Private Information

Jun Liu, Ehud Peleg and Avanidhar Subrahmanyam

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: We study the consumption-investment problem of a CRRA agent who possesses private information about the future prospects of a stock. We compute the value of the information to the agent by comparing the utility equivalent with and without the information of the agent. The value of private of information to the agent depends linearly on the wealth of agents and decreases with both the propensity to intermediate consumption and the risk aversion. Agents with low coefficients of relative risk aversion value private information more highly. Consistent with the empirical literature, the optimal portfolio holdings of informed agents are correlated with expected returns on the risky asset.

Date: 2004-08-23
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