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Information asymmetry, market state, and implementation risk

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  • Wu, Zhen-Xing
  • Chen, Tsung-Yu

Abstract

This study demonstrates that the information risk premium is strongly dependent on the state of the market. Stocks with high information risk, as measured by the probability of informed trading (PIN) or adjusted PIN (ADJPIN), exhibit higher returns than stocks with low information risk when the market is in a good state, but this is not the case when the market is bad. Further analysis reveals that the information risk premium is high when the implementation risk is low, suggesting that uninformed traders require high compensation from informed traders if the informed can easily arbitrage by exploiting the information advantage.

Suggested Citation

  • Wu, Zhen-Xing & Chen, Tsung-Yu, 2019. "Information asymmetry, market state, and implementation risk," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:ecofin:v:50:y:2019:i:c:s1062940818303188
    DOI: 10.1016/j.najef.2019.101007
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    More about this item

    Keywords

    Information risk; Probability of informed trading; Implementation risk; Market state;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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