Estimating the Value of Information

83 Pages Posted: 4 Jun 2016 Last revised: 9 Jul 2020

See all articles by Ohad Kadan

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Asaf Manela

Washington University in St. Louis - John M. Olin Business School; Reichman University

Date Written: May 1, 2018

Abstract

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

Kadan, Ohad and Manela, Asaf, Estimating the Value of Information (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=2788751 or http://dx.doi.org/10.2139/ssrn.2788751

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Asaf Manela (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-9178 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/manela

Reichman University ( email )

Israel

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