Is Information Risk Priced? Evidence from the Price Discovery of Large Trades

66 Pages Posted: 12 Mar 2009

See all articles by Chuan-Yang Hwang

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Xiaolin Qian

Eastspring Investment

Multiple version iconThere are 4 versions of this paper

Date Written: March 11, 2009


We develop an information risk measure that is based on the price discovery of large trades. As the price series of large trades and small trades are co-integrated, the price discovery of trades can be easily estimated via the vector error-correction model (VECM). Intuitively, we use VECM to study how a temporary gap between the large trade price and small trade price of the same stock is to be closed. If closing the gap is mostly done through small trade price with little movement in large trade price, then it means large trade price has been closer to the long-run equilibrium price, hence that the large trade price has a greater price discovery function for this particular stock. An important feature of our measure, inherent in its construction, is that a higher information risk necessarily means a lower illiquidity. This feature helps disentangle the pricing impact of information risk from that of illiquidity—a major advantage over other information risk measures such as PIN in the information risk pricing tests. We show that our information risk measure performs better than PIN in predicting stock returns and that its predicting power is not affected by various controls of illiquidity, suggesting that information risk is priced and is priced beyond the effect of illiquidity.

Keywords: Information risk, Price discovery, Trade size

JEL Classification: D82, G14

Suggested Citation

Hwang, Chuan-Yang and Qian, Xiaolin, Is Information Risk Priced? Evidence from the Price Discovery of Large Trades (March 11, 2009). Available at SSRN: or

Chuan-Yang Hwang

Nanyang Technological University (NTU) ( email )

Singapore, 639798
65-67905003 (Phone)
65-6791-3697 (Fax)

Xiaolin Qian (Contact Author)

Eastspring Investment ( email )

10 Marina Boulevard, #32-01
Marina Bay Financial Centre Tower 2
Singapore, 018983
018983 (Fax)

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