Estimating the Value of Information
83 Pages Posted: 4 Jun 2016 Last revised: 9 Jul 2020
Date Written: May 1, 2018
We derive a general expression for the value of information to a price-taking investor in a dynamic environment and provide a framework for its estimation. We study the value of both private and public information and break it down into its instrumental and psychic parts. To illustrate, we estimate values of leading macroeconomic indicators (GDP, employment, etc.) and rank them. Using variations in option prices we find that a consumer-investor with conventional preference parameters would pay 3 to 5 basis points of her wealth for a one-time private peek into these indicators. Such signals provide substantial instrumental value but only a minor psychic value. Estimated values of information increase with the time discount factor, decrease with risk aversion, and increase with the elasticity of intertemporal substitution.
Keywords: value of information, informativeness, options prices, recovery
JEL Classification: G10, G12, G13, D80, D82, D83
Suggested Citation: Suggested Citation