The Value of Knowing What is Happening

Abstract

There are three types of participants in the market: investors who have private information about the event (informed investors), investors who know the existence of the event and can infer information from equilibrium price (uninformed investors), and investors who don't know the existence of the event (Naive uninformed investors). With negative exponential utility and Gaussian randomness, a unique partially-rational expectation equilibrium is characterized. We further examine the subjective and objective Sharpe ratios as well as expected utilities of investors and identify the value of knowing what is happening in the market in addition to the value of private information in seminal Grossman-Stiglitz model. With possible negative objective Sharpe ratio and utility loss induced by participating the security market, we discourage individual investors (who don't know what is happening) from investing directly in the security market and hence justify the existence of asset management industry.

Date of Award	19 May 2023
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Du DU (Supervisor)