The Effect of Information Quality on Optimal Portfolio Choice
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. Copyright 2006, The Eastern Finance Association.
Year of publication: |
2006
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Authors: | Lundtofte, Frederik |
Published in: |
The Financial Review. - Eastern Finance Association - EFA. - Vol. 41.2006, 2, p. 157-185
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Publisher: |
Eastern Finance Association - EFA |
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