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A Simple Multimarket Measure of Information Asymmetry

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  • Travis L. Johnson

    (McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712)

  • Eric C. So

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

Abstract

We develop and implement a new measure of information asymmetry among traders. Our measure is based on the intuition that informed traders are more likely than uninformed traders to generate abnormal volume in options or stock markets. We formalize this intuition theoretically and compute the resulting multimarket information asymmetry measure (MIA) for firm-days as a function of unsigned volume totals and without estimating a structural model. Empirically, MIA has many desirable properties: it is positively correlated with spreads, price impact, and absolute order imbalances; predicts future volatility; is an effective conditioning variable for trading strategies stemming from price pressure; and detects exogenous shocks to information asymmetry.

Suggested Citation

  • Travis L. Johnson & Eric C. So, 2018. "A Simple Multimarket Measure of Information Asymmetry," Management Science, INFORMS, vol. 64(3), pages 1055-1080, March.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:3:p:1055-1080
    DOI: 10.1287/mnsc.2016.2608
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