Optimal Portfolio Rules and Maximum Gains from Economic Events.

This article proposes an integration of mean-variance portfolio theory and multivariate statistical theory in order to estimate the optimal trading strategy and the maximum welfare gain from knowledge of an economic economic event. It established an economic value for private information and public information in events such as accounting earnings announcements. It does so by postulating a noisy rational expectations market where informed agents receive information signals on a finite number of securities' returns. The result of the information signal is that informed agents see security return moments differently from the representative uninformed agent. Agents are assumed to behave rationally in a sense that they choose optimal asset portfolios, conditional on their respective information sets and return moments. The maximum value of the welfare gain is important because it places an upper bound on the value of the accounting announcement. The ability to place an upper bound on information value derives from the assumption of the noisy rational expectations return generating model.