“Portfolio Selection with Periodic News Arrival” by Lixin HUANG
City University of Hong Kong
We consider the optimal portfolio selection problem for a CRRA investor who derives utility from his terminal wealth. The stock return is predictable, but news about the value of the predictive variable arrives only periodically. We obtain the investor’s value function and optimal trading strategy in explicit forms. We show that the optimal trading strategy with periodic news arrival is surprisingly independent of the frequency and accuracy of any future news and only depends on the current conditional distribution of the predictive variable. The theoretical results are then used to study an empirical model after calibration. We show that news frequency and news accuracy have a large impact on the optimal trading strategy and the value of the news. We also illustrate how to compute the optimal news frequency and news accuracy. Finally, we find that although the benefit of incorporating predictability is significantly reduced due to the imperfect observability of the predictive variable, the cost of ignoring predictability is still substantial.