Valuing Information Using Utility Functions: How Much Should We Pay for Forecasts of Returns?

City University Business School Banking & Finance Working Paper

37 Pages Posted: 11 May 2001

See all articles by Soosung Hwang

Soosung Hwang

Sungkyunkwan University - Department of Economics

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Date Written: May 18, 2001

Abstract

This study investigates what is an appropriate level of investment management fees. Using the CRRA utility function with the range of the coefficient of the CRRA suggested by Mehra and Prescott (1985), we find that the value of information added by linear factor models of Fama and French (1992) exceeds observed management fees and only equals them for hitherto unmeasured magnitudes of risk aversion.

Keywords: Value of Information, CAPM, Fama-French Model

JEL Classification: G20, G12

Suggested Citation

Hwang, Soosung and Satchell, Stephen E., Valuing Information Using Utility Functions: How Much Should We Pay for Forecasts of Returns? (May 18, 2001). City University Business School Banking & Finance Working Paper. Available at SSRN: https://ssrn.com/abstract=266175 or http://dx.doi.org/10.2139/ssrn.266175

Soosung Hwang (Contact Author)

Sungkyunkwan University - Department of Economics ( email )

25-2 Sungkyunkwan-ro
Jongno-Gu
110-745 Seoul
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

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