AFFI International Conference 2017

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Asymmetric Information and the Distribution of Trading Volume

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We propose the coefficient of variation (ratio of standard deviation to mean) of trading
volume, VCV, as a new and easily computable measure of information asymmetry
in security markets. We derive from a simple microstructure model that VCV is
an increasing function of the proportion of informed trade. Simulations confirm this
result under more general assumptions. Empirically, we find that VCV is highly correlated
to extant measures of asymmetric information in the cross-section of US stocks.
Moreover, VCV sharply decreases after earnings announcements resolve information
asymmetries.

Author(s):

Matthijs Lof    
Aalto University
Finland

Jos van Bommel    
Luxembourg School of Finance
Luxembourg

 

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