The Value of Partial Jump Information

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 Ernst and Rogers: one who has no information about the jumps, one who knows in advance exactly when each jump will occur, and one who has no information about the time 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.

Funding: P. A. Ernst acknowledges support from The Royal Society Wolfson Fellowship. O. Mostovyi has been supported by the National Science Foundation [Grant DMS-1848339].