Information Risk and Momentum Anomalies

61 Pages Posted: 6 Oct 2010 Last revised: 20 Sep 2011

See all articles by Chuan-Yang Hwang

Chuan-Yang Hwang

Nanyang Technological University (NTU)

Xiaolin Qian

Eastspring Investment

Date Written: March 14, 2011


In this paper, we construct an information asymmetry factor (ECINF) based on the price discovery of large trades. ECINF is significantly negatively correlated with market excess return, indicating that market-wide information asymmetry is lower in bull markets, which is consistent with the view that more uninformed investors are attracted into stock markets when the markets offer high returns. ECINF is not only a priced risk factor, but the most significant factor in our asset pricing tests, which suggests that ignoring the risk of information asymmetry may give rise to false discoveries of anomalies. As a case in point, we show that momentum anomalies disappear once we control for the risk of information asymmetry. This is because there are fewer informed traders, and hence lower risk of information asymmetry, in bad news firms (past losers or low earning surprise firms) than in good news firms (past winners or high earning surprise firms). The larger cost and risk of arbitrage in taking short positions makes bad news firms less attractive to informed traders. Consistent with this explanation, we find that the loading on ECINF is lower in bad news firms than in good news firms; and is lower only in the holding periods when momentum exists. This difference in loadings increases significantly with idiosyncratic volatility, and this explains why momentum is stronger in firms with large idiosyncratic volatility. Regardless of the level of idiosyncratic volatility, the significantly positive Fama-French factors risk-adjusted returns of zero investment momentum portfolios are no longer significant once we include ECINF as an additional factor for risk adjustment.

Keywords: Information risk, momentum anomalies, idiosyncratic volatility

Suggested Citation

Hwang, Chuan-Yang and Qian, Xiaolin, Information Risk and Momentum Anomalies (March 14, 2011). 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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