Portfolio choice and private information: A note

Abstract

How does the arrival of information affect portfolio choice? What is the value of private information? This work examines the impact of private information in a setting where agents make portfolio decisions. We find that more that quantity of private information, what really matters to answer the above questions is how accurate is that information. Indeed, asset allocation decisions differ among informed and uninformed agents only if the quality of information is good enough. Furthermore, we find that agents endowed with a high accurate signal will invest more than uninformed agents, and the larger its precision, the larger the share allocated to the risk asset. The higher the degree of risk aversion, the higher the monetary value of the information, although not in a monotonic way. We also show that more information is beneficial only when it is of greater quality. When the solutions are interior, the value of information is affected by the precision of the signal, as well as the probability of having a good state but it is not influenced by variables like wealth, risk-free rate and the level of payoffs. The more precise private information is, the higher the value of that information; and the larger the initial prior of having a high return, the less useful that information is. We find that when the agents have private information, their portfolio choice becomes more sensitive to the arrival of new information, provided the quality of it is good enough. We also show that more information is beneficial only when it is of greater quality. When the solutions are interior, the value of information is affected by the precision of the signal, as well as the probability of having a good state but it is not influenced by variables like wealth, risk free rate and the level of payoffs. The paper shows that the more precise private information, the higher the value of information. Furthermore, the larger the initial prior of having a high return, the less useful the information.