Identifying information asymmetry in securities markets

Kerry Back; Kevin Crotty; Tao Li

doi:10.1093/rfs/hhx133

Identifying information asymmetry in securities markets

Kerry Back, Kevin Crotty^*, Tao Li

^*Corresponding author for this work

Department of Economics and Finance

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

31 Citations (Scopus)

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.

Original language	English
Pages (from-to)	2277-2325
Journal	Review of Financial Studies
Volume	31
Issue number	6
Online published	30 Nov 2017
DOIs	https://doi.org/10.1093/rfs/hhx133
Publication status	Published - 1 Jun 2018

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N2 - 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.

AB - 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.

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JO - Review of Financial Studies

JF - Review of Financial Studies

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Identifying information asymmetry in securities markets

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