The Value of Private Information

46 Pages Posted: 2 Jan 2005

See all articles by Jun Liu

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management

Ehud Peleg

University of California, Los Angeles (UCLA) - Anderson School of Management

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: January 15, 2005

Abstract

We study the consumption-investment problem of an agent with constant relative risk aversion (CRRA) preferences who possesses private information about the future prospects of a stock. We examine the value of the information to the agent by comparing the utility equivalent with and without the information of the agent. The value of private of information to the agent depends linearly on the wealth of agents and decreases with both the propensity to intermediate consumption and the risk aversion. Agents with low coefficients of relative risk aversion value private information more highly. Highly risk averse informed agents consume a greater fraction of their wealth when they are informed than when they are uninformed, but the opposite is true of agents with low degrees of risk aversion. Consistent with the empirical literature, the optimal portfolio holdings of informed agents are correlated with expected returns on the risky asset.

Keywords: Information, portfolio choice

JEL Classification: G11, G14

Suggested Citation

Liu, Jun and Peleg, Ehud and Subrahmanyam, Avanidhar, The Value of Private Information (January 15, 2005). Available at SSRN: https://ssrn.com/abstract=650761 or http://dx.doi.org/10.2139/ssrn.650761

Jun Liu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858.534.2022 (Phone)
5858.534.0745 (Fax)

Ehud Peleg

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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