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Identifying Information Asymmetry in Securities Markets

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  • Kerry Back
  • Kevin Crotty
  • Tao Li

Abstract

We propose and estimate a model of endogenous informed trading that is a hybrid of the PIN and Kyle models. When an informed trader trades optimally, both returns and order flows are needed to identify information asymmetry parameters. Empirical relationships between parameter estimates and price impacts and between parameter estimates and stochastic volatility are consistent with theory. We illustrate how the estimates can be used to detect information events in the time series and to characterize the information content of prices in the cross-section. We also compare the estimates to those from other models on various criteria. Received April 5, 2017; editorial decision September 21, 2017 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Kerry Back & Kevin Crotty & Tao Li, 2018. "Identifying Information Asymmetry in Securities Markets," The Review of Financial Studies, Society for Financial Studies, vol. 31(6), pages 2277-2325.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:6:p:2277-2325.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx133
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