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

68 Pages Posted: 2 Apr 2010 Last revised: 20 Sep 2011

See all articles by Xiaolin Qian

Xiaolin Qian

Eastspring Investment

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Multiple version iconThere are 4 versions of this paper

Date Written: Oct 2010


We develop an information risk measure (ECIN) based on the price discovery of large trades. As the price series of large trades and small trades are cointegrated, the price discovery of trades can be easily estimated via the vector error-correction model (VECM). Intuitively, we use the VECM to study how a temporary gap between the large trade price and the small trade price for the same stock is closed. If most of the gap is closed through adjustment in the small trade price with little movement in the large trade price, this indicates large trade price has been closer to the long-run equilibrium price and hence that the large trade price has a greater price discovery function for the stock in question. Since informed traders prefer to trade in large size, firms whose large trades have a larger price discovery are deemed to have larger information risk. An important feature of ECIN that is inherent to its construction is that higher ECIN also means lower illiquidity. This feature helps to disentangle the pricing impact of information risk from that of illiquidity - a major advantage over other information risk measures in the asset pricing tests of information risk. We show that ECIN is priced and its predictive power of stock returns is far more significant than those of book-to-market and momentum.

Keywords: Information Risk, Large Trade, VECM

JEL Classification: G12,G14

Suggested Citation

Qian, Xiaolin and Hwang, Chuan-Yang, Is Information Risk Priced? Evidence from the Price Discovery of Large Trades (Oct 2010). AFA 2011 Denver Meetings Paper. Available at SSRN: or

Xiaolin Qian

Eastspring Investment ( email )

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

Chuan-Yang Hwang (Contact Author)

Nanyang Technological University (NTU) ( email )

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

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