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A Simple Multimarket Measure of Information Asymmetry

Management Science, Forthcoming

52 Pages Posted: 27 Nov 2012 Last revised: 20 Jul 2016

Travis L. Johnson

The University of Texas at Austin - Department of Finance

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: July 19, 2016

Abstract

We develop and implement a new measure of information asymmetry among traders. Our measure is based on the intuition that informed traders are more likely than uninformed traders to generate abnormal volume in options or stock markets. We formalize this intuition theoretically and compute the resulting measure, MIA, for firm-days as a function of unsigned volume totals and without estimating a structural model. Empirically, MIA has many desirable properties: it is positively correlated with spreads, price impact, and absolute order imbalances; predicts future volatility; is an effective conditioning variable for trading strategies stemming from price pressure; and detects exogenous shocks to information asymmetry.

Keywords: Information asymmetry, PIN, informed trade, options, microstructure, bid-ask spreads, volatility

JEL Classification: G10, G12, G14, G18

Suggested Citation

Johnson, Travis L. and So, Eric C., A Simple Multimarket Measure of Information Asymmetry (July 19, 2016). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2181038 or http://dx.doi.org/10.2139/ssrn.2181038

Travis L. Johnson (Contact Author)

The University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/johnson

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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