The Characteristics of Informed Trading: Implications for Asset Pricing

Hadiye Aslan, David Easley, Søren Hvidkjær, Maureen O'Hara

Research output: Contribution to journalReviewResearchpeer-review

Abstract

This paper investigates the linkage of microstructure, accounting, and asset pricing. We determine the relationship between firm characteristics as captured by accounting and market data and a firm's probability of private information-based trade (PIN) as estimated from trade data. This allows us to determine what types of firms have high information risk. We then use these data to create an instrument for PIN, the PPIN, which we can estimate from firm-specific data. We show that PPINs have explanatory power for the cross-section of asset returns in long sample tests. We also investigate whether information risk vitiates the influence of other variables on asset returns. We develop a PPIN factor and show that it dominates the Amihud factor in asset returns. Our results provide strong support for information risk affecting asset returns in long sample tests.
Original languageEnglish
JournalJournal of Empirical Finance
Volume18
Issue number5
Pages (from-to)782-801
Number of pages19
ISSN0927-5398
DOIs
Publication statusPublished - 2011

Cite this

Aslan, Hadiye ; Easley, David ; Hvidkjær, Søren ; O'Hara, Maureen. / The Characteristics of Informed Trading : Implications for Asset Pricing. In: Journal of Empirical Finance. 2011 ; Vol. 18, No. 5. pp. 782-801.
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The Characteristics of Informed Trading : Implications for Asset Pricing. / Aslan, Hadiye; Easley, David; Hvidkjær, Søren; O'Hara, Maureen.

In: Journal of Empirical Finance, Vol. 18, No. 5, 2011, p. 782-801.

Research output: Contribution to journalReviewResearchpeer-review

TY - JOUR

T1 - The Characteristics of Informed Trading

T2 - Implications for Asset Pricing

AU - Aslan, Hadiye

AU - Easley, David

AU - Hvidkjær, Søren

AU - O'Hara, Maureen

PY - 2011

Y1 - 2011

N2 - This paper investigates the linkage of microstructure, accounting, and asset pricing. We determine the relationship between firm characteristics as captured by accounting and market data and a firm's probability of private information-based trade (PIN) as estimated from trade data. This allows us to determine what types of firms have high information risk. We then use these data to create an instrument for PIN, the PPIN, which we can estimate from firm-specific data. We show that PPINs have explanatory power for the cross-section of asset returns in long sample tests. We also investigate whether information risk vitiates the influence of other variables on asset returns. We develop a PPIN factor and show that it dominates the Amihud factor in asset returns. Our results provide strong support for information risk affecting asset returns in long sample tests.

AB - This paper investigates the linkage of microstructure, accounting, and asset pricing. We determine the relationship between firm characteristics as captured by accounting and market data and a firm's probability of private information-based trade (PIN) as estimated from trade data. This allows us to determine what types of firms have high information risk. We then use these data to create an instrument for PIN, the PPIN, which we can estimate from firm-specific data. We show that PPINs have explanatory power for the cross-section of asset returns in long sample tests. We also investigate whether information risk vitiates the influence of other variables on asset returns. We develop a PPIN factor and show that it dominates the Amihud factor in asset returns. Our results provide strong support for information risk affecting asset returns in long sample tests.

KW - Asset pricing

KW - PIN models

KW - Accounting

KW - Microstructure

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