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Why does public news augment information asymmetries?

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  • Crego, Julio A.

Abstract

The arrival of a public signal worsens the adverse selection problem if informed investors are risk averse. Precisely, the public signal reduces uncertainty which boosts informed investors’ participation leading to a more toxic order flow. I confirm the model’s empirical predictions by estimating the effect of the publication of the weekly change in oil inventories on liquidity via a difference-in-differences strategy. The bid-ask spread of stocks related to oil doubles after the release and their volume increases by 32% regardless of the report’s surprise. Further, consistent with the model, implied volatility drops and insider’s trading increases after the report’s publication.

Suggested Citation

  • Crego, Julio A., 2020. "Why does public news augment information asymmetries?," Journal of Financial Economics, Elsevier, vol. 137(1), pages 72-89.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:1:p:72-89
    DOI: 10.1016/j.jfineco.2019.05.020
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    2. Huan Liu & Weiqi Liu & Yi Li, 2022. "Private Information Dissemination and Noise Trading: Implications for Price Efficiency and Market Liquidity," Sustainability, MDPI, vol. 14(18), pages 1-19, September.
    3. Kerssenfischer, Mark & Schmeling, Maik, 2022. "What moves markets?," Discussion Papers 16/2022, Deutsche Bundesbank.
    4. Stanislav Anatolyev & Sergei Seleznev & Veronika Selezneva, 2021. "How does the financial market update beliefs about the real economy? Evidence from the oil market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(7), pages 938-961, November.
    5. Niu, Zibo & Liu, Yuanyuan & Gao, Wang & Zhang, Hongwei, 2021. "The role of coronavirus news in the volatility forecasting of crude oil futures markets: Evidence from China," Resources Policy, Elsevier, vol. 73(C).

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    More about this item

    Keywords

    Public information; News release; Asymmetric information; liquidity;
    All these keywords.

    JEL classification:

    • 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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