Is Information Risk a Determinant of Asset Returns?

David Easley, Søren Hvidkjær, Maureen O'Hara

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalJournal of Finance
Volume57
Issue number5
Pages (from-to)2185-2221
Number of pages37
ISSN0022-1082
DOIs
Publication statusPublished - 2002
Externally publishedYes

Cite this

Easley, David ; Hvidkjær, Søren ; O'Hara, Maureen. / Is Information Risk a Determinant of Asset Returns?. In: Journal of Finance. 2002 ; Vol. 57, No. 5. pp. 2185-2221.
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Is Information Risk a Determinant of Asset Returns? / Easley, David; Hvidkjær, Søren; O'Hara, Maureen.

In: Journal of Finance, Vol. 57, No. 5, 2002, p. 2185-2221.

Research output: Contribution to journalJournal articleResearchpeer-review

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AB - 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.

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