Entropy -Reducing Properties of Predictive Financial Models

The fundamental objects of communication theory (sources and receivers, channels, the rate of transmission of information) are shown to have natural analogues within economic systems and models. Kelly's interpretation of the information rate [Bell System Technical Journal, 1956] is generalized: his "gambler with a private wire" is replaced by an investor with a predictor model, operating in an arbitrage-free economic system. The potential usefulness of the theory is established by the demonstration of an important predictor model producing strongly positive information rates over extended time periods.