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Is Information Risk a Determinant of Asset Returns?

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  • David Easley

    (Cornell University,)

  • Soeren Hvidkjaer

    (University of Maryland)

  • Maureen O'Hara

    (Cornell University,)

Abstract

We investigate the role of information-based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information-based trading, and we estimate this measure using data for individual NYSE-listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French (1992) asset-pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information-based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year. Copyright The American Finance Association 2002.

Suggested Citation

  • David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:5:p:2185-2221
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