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Momentum and asymmetric information

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  • Tian Liang

Abstract

Purpose - The purpose of this paper is to examine the implications of asymmetric information for price evolution and investor behavior under a rational expectations framework. Design/methodology/approach - The author presents a simple asymmetric information‐based asset‐pricing model to show that private information and its revelation can generate price momentum. To empirically test this implication of the model, Easleyet al.'s probability of information‐based trade (PIN) is used as a proxy for private information. Findings - High PIN firms are found to have larger magnitudes of momentum effect even after controlling for size. The abnormal returns are both economically and statistically significant, and cannot be explained by the Fama‐French factors. Originality/value - This study provides both an information‐based theory to explain the momentum anomaly and empirical support for the theory.

Suggested Citation

  • Tian Liang, 2012. "Momentum and asymmetric information," China Finance Review International, Emerald Group Publishing Limited, vol. 2(3), pages 208-230, June.
    • Handle: RePEc:eme:cfripp:v:2:y:2012:i:3:p:208-230
    DOI: 10.1108/20441391211231015
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    References listed on IDEAS

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    1. 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.
    2. Kim, O & Verrecchia, Re, 1991. "Trading Volume And Price Reactions To Public Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 302-321.
    3. He, Hua & Wang, Jiang, 1995. "Differential Information and Dynamic Behavior of Stock Trading Volume," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 919-972.
    4. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    5. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. "Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-1698, December.
    6. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, August.
    7. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-835.
    8. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    9. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
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    Cited by:

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