First Name: Narelle
Department Dept of Applied Finance and Actuarial Studies
Supervisor(s): Doctor Edward Watts , Doctor Qiongbing (Linda) Wu
Information Asymmetry, Information Attributes and Industry Sector Returns
We examine whether the probability of informed trade (PIN), a microstructure measure of information asymmetry, influences stock returns in Australia.
We provide evidence of PINís price effect in a market which is significantly different, in its information attributes, to the U.S. markets the subject of most of the existing empirical studies. We consider the differential pricing effect among sectors/categories of stocks that are distinguished by characteristics known to influence a firmís information environment.
Key literature/theoretical perspective
Recent theory proposes that stocks with a high proportion of private information should have expected returns greater than those with a greater proportion of public information. However, empirical studies which use PIN as a proxy for the risk of privately informed trade, raise question as to whether PIN is priced and, if it is, whether the result is attributable to the information asymmetry that one associates with some investor(s) holding a private information advantage over others.
We use portfolio sorts and cross sectional asset-pricing tests where monthly excess stock returns are regressed on PIN, controlling for other factors known to influence returns.
We find PIN has a strong price-effect among Industrial sector stocks but not among Resources sector stocks and among stocks without an established record of operating revenue.
Our findings suggest that PIN is not universally priced; caution is needed when applying PIN in the pricing of highly speculative stocks.
Information asymmetry, information attributes, probability of informed trade, PIN, industry sector returns