Generalized stochastic differential utility and preference for information

Details Generalized stochastic differential utility and preference for information Generalized stochastic differential utility and preference for information

2005-03-25

arxiv.org/abs/math/0503579v1

Annals of Applied Probability 2004, Vol. 14, No. 4, 2149-2175

Mathematics

Probability

Published at http://dx.doi.org/10.1214/105051604000000756 in the Annals of Applied Probability (http://www.imstat.org/aap/) by

Scientific paper

10.1214/105051604000000756

This paper develops, in a Brownian information setting, an approach for analyzing the preference for information, a question that motivates the stochastic differential utility (SDU) due to Duffie and Epstein [Econometrica 60 (1992) 353-394]. For a class of backward stochastic differential equations (BSDEs) including the generalized SDU [Lazrak and Quenez Math. Oper. Res. 28 (2003) 154-180], we formulate the information neutrality property as an invariance principle when the filtration is coarser (or finer) and characterize it. We also provide concrete examples of heterogeneity in information that illustrate explicitly the nonneutrality property for some GSDUs. Our results suggest that, within the GSDUs class of intertemporal utilities, risk aversion or ambiguity aversion are inflexibly linked to the preference for information.

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