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The characteristics of informed trading: Implications for asset pricing

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  • Aslan, Hadiye
  • Easley, David
  • Hvidkjaer, Soeren
  • O'Hara, Maureen

Abstract

This paper investigates the linkage of microstructure, accounting, and asset pricing. We determine the relationship between firm characteristics as captured by accounting and market data and a firm's probability of private information-based trade (PIN) as estimated from trade data. This allows us to determine what types of firms have high information risk. We then use these data to create an instrument for PIN, the PPIN, which we can estimate from firm-specific data. We show that PPINs have explanatory power for the cross-section of asset returns in long sample tests. We also investigate whether information risk vitiates the influence of other variables on asset returns. We develop a PPIN factor and show that it dominates the Amihud factor in asset returns. Our results provide strong support for information risk affecting asset returns in long sample tests.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 18 (2011)
Issue (Month): 5 ()
Pages: 782-801

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Handle: RePEc:eee:empfin:v:18:y:2011:i:5:p:782-801

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Asset pricing; Microstructure; Accounting; PIN models;

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Cited by:
  1. Igor Filatotchev & Xiaoxiang Zhang & Jenifer Piesse, 2011. "Multiple agency perspective, family control, and private information abuse in an emerging economy," Asia Pacific Journal of Management, Springer, vol. 28(1), pages 69-93, March.
  2. Chen, Yifan & Zhao, Huainan, 2012. "Informed trading, information uncertainty, and price momentum," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2095-2109.
  3. De Cesari, Amedeo & Espenlaub, Susanne & Khurshed, Arif & Simkovic, Michael, 2012. "The effects of ownership and stock liquidity on the timing of repurchase transactions," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1023-1050.
  4. He, Wen & Li, Donghui & Shen, Jianfeng & Zhang, Bohui, 2013. "Large foreign ownership and stock price informativeness around the world," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 211-230.
  5. Ferreira, Daniel & Ferreira, Miguel A. & Raposo, Clara C., 2011. "Board structure and price informativeness," Journal of Financial Economics, Elsevier, vol. 99(3), pages 523-545, March.
  6. James J. Choi & Li Jin & Hongjun Yan, 2013. "Informed Trading and Expected Returns," NBER Working Papers 18680, National Bureau of Economic Research, Inc.
  7. Marco W├Âlfle, 2009. "Information-based trade in Russia and the effects of listing abroad," Economic Change and Restructuring, Springer, vol. 42(4), pages 229-262, November.
  8. Gordon, Narelle & Watts, Edward & Wu, Qiongbing, 2014. "Information attributes, information asymmetry and industry sector returns," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 156-175.
  9. Hwang, Lee-Seok & Lee, Woo-Jong & Lim, Seung-Yeon & Park, Kyung-Ho, 2013. "Does information risk affect the implied cost of equity capital? An analysis of PIN and adjusted PIN," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 148-167.

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