Informed trading and price efficiency

Narelle Gordon

Research output: Contribution to journalMeeting abstract

Abstract

Purpose: To examine the impact of informed trade on cross autocorrelations in stock returns in Australia. Originality: The first study, to our knowledge, that examines the role of information risk in lead-lag return relationships using ASX intraday trading data. Key literature/theoretical perspective: Stocks of small firms with low institutional ownership, that have little coverage by financial analysts and have lower stock turnover are considered less recognised (Merton 1987) and tend to be ‘follower’ stocks in terms of the observed lead-lag effects in stock returns (Hou& Moskowitz, 2005; Lo and MacKinlay, 1990; Sias and Starks, 1997; Brennan et al, 1993; Chordia and Swaminathan, 2000). We posit that the effect is influenced by the information environment of the firm; the risk of informed trade will tend to reduce the category-relevance of information contained in stock returns. Design/methodology/approach: We use Easley, Kiefer, O’Hara and Paperman’s ( 1996 “Liquidity, Information, and Infrequently Traded Stocks.” Journal of Finance 51(4), 1405–1436) measure of the probability of informed trade (‘PIN’) to identify stocks and portfolios that have high(low) information risk. We consider the association between PIN and observed return autocovariances. Research limitations/implications: The importance of a firm’s information structure to price efficiency and gradual information diffusion.
Original languageEnglish
Pages (from-to)36-37
Number of pages2
JournalExpo 2011 Higher Degree Research : book of abstracts
Publication statusPublished - 2011
EventHigher Degree Research Expo (7th : 2011) - Sydney
Duration: 10 Oct 201111 Oct 2011

Keywords

  • PIN
  • information risk
  • delay

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