A Comparative Analysis of the Value of Information in a Continuous Time Market Model with Partial Information: The Cases of Log-Utility and CRRA.
31 Pages Posted: 7 Aug 2007 Last revised: 11 May 2010
Date Written: August 1, 2007
In this paper we study the question what value an agent in a generalized Black-Scholes model with partial information attributes to the complementary information. To do this, we study the utility maximization problems from terminal wealth for the two cases partial information and full information. We assume that the drift term of the risky asset is a dynamic process of general linear type and that the two levels of observation correspond to whether this drift term is observable or not. Applying methods from stochastic filtering theory we derive an analytical tractable formula for the value of information in the case of logarithmic utility. For the case of constant relative risk aversion (CRRA) we derive a semi-analytical formula, which uses as an input the numerical solution of a system of ODE's. For both cases we present a comparative analysis.
Keywords: Partial information, value of information, stochastic optimal control, stochastic filtering, information economics
JEL Classification: D82, C61, G11, D81
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