A General Framework for Costly Information Transmission in Continuous Time

36 Pages Posted: 23 Jul 2010

See all articles by Yizhou Cao

Yizhou Cao

National University of Singapore (NUS)

Min Dai

National University of Singapore (NUS) - Department of Mathematics

Hefei Wang

University of Illinois at Chicago - Department of Finance

Date Written: July 22, 2010

Abstract

Abstract In this paper, we study a costly information transmission problem in the continuous time domain. We formulate a model that incorporates broadcasting costs, misaligned incentives between the information sender and receiver, receiver's naivety, and penality costs of misrepresenting information. We derive the Hamilton-Jacobi equation associated with this stochastic control problem and characterize the sender's optimal strategy. Two specific model settings are examined here. The infinite time horizon case is solved analytically while the finite time horizon case is solved numerically. Furthermore, this paper includes a practical application of the proposed model to the stock recommendation analysis, which is also solved numerically. The sensitivity of the numerical solution to model parameters is analyzed.

Suggested Citation

Cao, Yizhou and Dai, Min and Wang, Hefei, A General Framework for Costly Information Transmission in Continuous Time (July 22, 2010). Available at SSRN: https://ssrn.com/abstract=1646755 or http://dx.doi.org/10.2139/ssrn.1646755

Yizhou Cao

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Min Dai

National University of Singapore (NUS) - Department of Mathematics ( email )

Singapore

Hefei Wang (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-413-8374 (Phone)

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