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The Effect of Information Quality on Optimal Portfolio Choice
Author(s) -
Lundtofte Frederik
Publication year - 2006
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2006.00137.x
Subject(s) - portfolio , insider , stock (firearms) , variance (accounting) , econometrics , economics , information quality , quality (philosophy) , financial economics , actuarial science , microeconomics , business , information system , accounting , geography , political science , philosophy , epistemology , law , archaeology
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.