Paper: arXiv 2402.11864

Authors: Sebastian Jaimungal, Xiaofei Shi

Abstract

When an investor is faced with the option to purchase additional information regarding an asset price, how much should she pay? To address this question, we solve for the indifference price of information in a setting where a trader maximizes her expected utility of terminal wealth over a finite time horizon. If she does not purchase the information, then she solves a partial information stochastic control problem, while, if she does purchase the information, then she pays a cost and receives partial information about the asset’s trajectory. We further demonstrate that when the investor can purchase the information at any stopping time prior to the end of the trading horizon, she chooses to do so at a deterministic time.

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 2.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a strong theoretical framework using stochastic control and utility maximization to solve for the indifference price of information. However, it is purely theoretical with no empirical backtesting or real-world data application, placing it in the Lab Rats quadrant.

Research Flowchart

  flowchart TD
    A[Research Goal: Determine Indifference Price & Timing for Asset Information] --> B[Data/Inputs: Asset Price Trajectory, Utility Function, Time Horizon]
    B --> C[Methodology: Compare Decision Paths]
    
    C --> D[Path 1: No Info Purchased<br/>Solve Partial Info Stochastic Control Problem]
    C --> E[Path 2: Info Purchased<br/>Solve Full/Enhanced Info Utility Maximization with Cost]
    
    D & E --> F[Compute Indifference Price<br/>Match Expected Terminal Utilities]
    F --> G[Analyze Optimal Stopping Time for Info Purchase]
    
    G --> H[Outcomes: Quantitative Info Pricing Model &<br/>Proof that Info Purchase Time is Deterministic]

Cited References (29)

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  8. Informed traders (2009)
and 21 more
  1. Trading algorithms with learning in latent alpha models (2019)
  2. Ordinary differential equations with applications (2006)
  3. Dynamic portfolio choice with parameter uncertainty and the economic value of analysts’ recommendations (2006)
  4. On the value of information in controlled diffusion processes (1991)
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  8. Asymmetric information in fads models (2006)
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  10. Representation of G aussian processes equivalent to W iener process (1968)
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0 of 29 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.