A Strategic Trade Optimization Approach to Identifying Private Information
77 Pages Posted: 1 Dec 2014 Last revised: 18 Jan 2022
Date Written: January 18, 2022
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
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