The Value of Private Information

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