A Strategic Trade Optimization Approach to Identifying Private Information

77 Pages Posted: 1 Dec 2014 Last revised: 18 Jan 2022

See all articles by Dion Bongaerts

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Dominik Rösch

State University of New York at Buffalo - School of Management

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2022

Abstract

We propose a strategic trade optimization approach to identifying private information. In our model, investors are exposed to liquidity and private information shocks and strategically optimize their trading across stocks taking into account price impact (Kyle's λ). The model yields a simple private information measure: λ×OIB (order imbalance). Intuitively, observed order imbalance is more likely to be information-driven when trading is expensive. Consistent with our measure capturing private information, we show empirically that it is greater for smaller firms with higher analyst dispersion, helps explain return reversals, predicts return volatility, and increases before M&A announcements and after analyst coverage terminations.

Keywords: informed trading, private information, strategic trade optimization

JEL Classification: G11, G12, G14, D82

Suggested Citation

Bongaerts, Dion and Rösch, Dominik and Van Dijk, Mathijs A., A Strategic Trade Optimization Approach to Identifying Private Information (January 18, 2022). Available at SSRN: https://ssrn.com/abstract=2532128 or http://dx.doi.org/10.2139/ssrn.2532128

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands
+31 (0) 10 40 82 790 (Phone)
+31 (0) 10 40 89 017 (Fax)

HOME PAGE: http://www.rsm.nl/portal/page/portal/home/faculty/academic_departments/finance/faculty_and_staff/fac

Dominik Rösch (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

HOME PAGE: http://dominikroesch.com

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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