The Effects of Information-Based Trading on Daily Returns and Risk of Individual Stocks

Abstract

This paper investigates the dynamic relation between information-based trading of a stock and its daily return and risk. It develops a theoretical model to motivate the regression specifications for empirical analysis. Based on two samples of stocks, we demonstrate that the expected trading imbalance determines stock daily return while the expected total trades determine volatility. Trade imbalance arisen from private information plays a dominant role in determining return while trades due to disputable public information are the dominant contributor to the risk. Public-information trading is further identified to be associated with the contemporaneous idiosyncratic risk rather than systematic risk.