Informed Trading and Expected Returns

46 Pages Posted: 17 Jan 2013 Last revised: 25 Jan 2016

See all articles by James J. Choi

James J. Choi

Yale School of Management; National Bureau of Economic Research (NBER)

Li Jin

Peking University - Department of Finance

Hongjun Yan

DePaul University

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2016

Abstract

Does information asymmetry affect the cross-section of expected stock returns? We explore this question using representative portfolio holdings data from the Shanghai Stock Exchange. We show that institutional investors have a strong information advantage, and that past aggressiveness of institutional trading in a stock positively predicts institutions’ future information advantage in this stock. Sorting stocks on this predictor and controlling for other correlates of expected returns, we find that the top quintile’s average annualized return in the next month is 10.8% higher than the bottom quintile’s, indicating that information asymmetry increases expected returns.

Keywords: Information asymmetry, Adverse selection, Cost of capital

Suggested Citation

Choi, James J. and Jin, Li and Yan, Hongjun, Informed Trading and Expected Returns (January 22, 2016). Available at SSRN: https://ssrn.com/abstract=2193733 or http://dx.doi.org/10.2139/ssrn.2193733

James J. Choi

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Li Jin

Peking University - Department of Finance ( email )

Beijing
China

Hongjun Yan (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/view/hongjunyan

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