Dynamic Portfolio Choice with Information Acquisition

Abstract

We consider the joint dynamics of information acquisition and portfolio choice by a CRRA investor who can purchase information about a risky asset. The ability to purchase information creates persistence in returns. Indeed, information improves portfolio performance, which in turn increases the budget available for future information purchases as well as the benefit of such purchases. First, we show that the dynamic benefit of information implies that the longer the investor's horizon, the more information he purchases. It also implies that, controlling for the expected risk premium, the longer the investor's horizon, the riskier his portfolio. Second, we characterize the condition under which an investor with logarithmic utility follows a myopic policy for both information acquisition and portfolio choice. Finally, we show that investors' ability to purchase information contributes to wealth distribution inequality.