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The Effect of Information Quality on Optimal Portfolio Choice

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Author

  • Frederik Lundtofte

Summary, in English

Three types of agents acting on different information sets are considered: fully informed agents, insiders, and outsiders. Differences in information quality are shown to affect the properties of their optimal portfolios. For an outsider, the share of wealth invested in the stock is decreasing in the variance of the stock. However, for an insider, the effect of an increasing stock variance on the optimal portfolio weight is ambiguous. In a calibration to U.S. data, the confidence intervals of the insider’s demand for the stock converge, whereas the outsider’s confidence intervals become wider.

Publishing year

2006

Language

English

Pages

157-185

Publication/Series

Financial Review

Volume

41

Issue

2

Document type

Journal article

Publisher

Wiley-Blackwell

Topic

  • Economics

Keywords

  • incomplete information
  • learning
  • estimation risk
  • portfolio choice
  • hedging demands

Status

Published

ISBN/ISSN/Other

  • ISSN: 0732-8516