An Empirical Investigation of Trading on Asymmetric Information and Heterogeneous Prior Beliefs
Journal of Empirical Finance
Posted: 19 Oct 2000
The purpose of this study is to analyze inter-temporal trading patterns attributable to informed trading, and distinguish between trading due to asymmetric information and trading due to heterogeneous prior beliefs. Although liquidity and asymmetric information motives for trading are well established in the literature, there is much less consensus about the role played by heterogeneous beliefs. If trading on heterogeneous prior beliefs describes actual order flows, then this motive could be a source of considerable trading volume and may be responsible for previously-documented trading patterns. We apply the econometric procedures of Easley, Kiefer, O'Hara, Paperman (1996 Journal of Finance 51, 1405-1436) to the testable hypotheses of Wang's (1998 Journal of Financial Markets 1, 321-352) informed trader model. The empirical findings confirm the existence of trading on heterogeneous prior beliefs and generally support the inter-temporal patterns proposed by Wang (1998).
Note: This is a description of the paper and not the actual abstract.
JEL Classification: G10, G14
Suggested Citation: Suggested Citation