The value of partial information

TL;DR

This paper analyzes how different levels of insider information about jumps in risky assets affect pricing rules for income streams and liabilities, providing explicit formulas and quantifying the value of partial information.

Contribution

It derives explicit state price densities and pricing rules for agents with varying jump information, extending previous models to include partial insider knowledge.

Findings

Explicit formulas for state price densities for different information levels.

Quantification of the value of partial information in pricing income streams.

Characterization of pricing rules under jump risk with insider information.

Abstract

We investigate a pricing rule that is applicable for streams of income or contingent claim liabilities and study how this rule changes under additional insider-type information that an investor might obtain. Considering a model where the risky asset might have jumps, we obtain an explicit form of the associated state price density for the three different types of agents considered in [ER20]: one who has no information about the jumps, one who knows in advance exactly when the each jump will occur, and one who has no information about the size of the jumps but has partial information about the size of each jump. For each of these agents, we provide characterizations of the pricing rule and establish a representation formula, allowing us to quantify the value of partial information for streams of labor income or contingent claim liabilities. Our work is motivated by finding and characterizing a pricing rule that, both with or without partial information about jumps, assigns different values of information for different income streams or contingent claim liabilities.