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Dynamic portfolio choice with information-processing constraints and finite investment horizon

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  • Yin, Xiaoqing
  • Wang, Haijun

Abstract

This paper explores how information-processing constraints affect an investor’s dynamic portfolio choice with finite investment horizon. With the given information channel capacity, we give a closed-form solution. We find that the risky portfolio share increases with the information channel capacity and fast converges to its true mean. In the case of endogenous channel capacity, we give an approximate solution. Due to the information cost, the optimal channel capacity decreases with time and the risky portfolio share is convex in time for a long investment horizon.

Suggested Citation

  • Yin, Xiaoqing & Wang, Haijun, 2025. "Dynamic portfolio choice with information-processing constraints and finite investment horizon," Economics Letters, Elsevier, vol. 251(C).
    • Handle: RePEc:eee:ecolet:v:251:y:2025:i:c:s0165176525001557
    DOI: 10.1016/j.econlet.2025.112318
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    References listed on IDEAS

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    1. Chen, Xingjiang & Ruan, Xinfeng & Zhang, Wenjun, 2021. "Dynamic portfolio choice and information trading with recursive utility," Economic Modelling, Elsevier, vol. 98(C), pages 154-167.
    2. Lei, Xiaowen, 2019. "Information and Inequality," Journal of Economic Theory, Elsevier, vol. 184(C).
    3. Mu, Congming & Yang, Jinqiang & Zhang, Yuhua, 2020. "Investment timing with information-processing constraints," Finance Research Letters, Elsevier, vol. 32(C).
    4. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    5. Yulei Luo, 2017. "Robustly Strategic Consumption–Portfolio Rules with Informational Frictions," Management Science, INFORMS, vol. 63(12), pages 4158-4174, December.
    6. Zhang, Yuhua & Mu, Congming, 2021. "Optimal ownership of entrepreneurial firms with rational inattention," Economics Letters, Elsevier, vol. 209(C).
    7. Han, Leyla Jianyu & Kasa, Kenneth & Luo, Yulei, 2024. "Ambiguity, information processing, and financial intermediation," Journal of Economic Theory, Elsevier, vol. 222(C).
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    9. Frederik Lundtofte, 2006. "The Effect of Information Quality on Optimal Portfolio Choice," The Financial Review, Eastern Finance Association, vol. 41(2), pages 157-185, May.
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    More about this item

    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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