A Portfolio Optimization Approach to Identifying Private Information

46 Pages Posted: 1 Dec 2014 Last revised: 8 Oct 2018

Dion Bongaerts

Erasmus University Rotterdam (EUR) - Finance

Dominik Rösch

State University of New York at Buffalo - School of Management; Erasmus University - Rotterdam School of Management

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2014

Abstract

We propose a portfolio optimization approach to identifying private information. In our model, investors are exposed to liquidity and private information shocks and optimize their trading across stocks taking into account price impact (Kyle's Lambda). We obtain a very simple expression for a stock's private information shock: Lambda x 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 to explain return reversals, predicts return volatility, and increases before M&A announcements.

Keywords: XPIN, informed trading, private information, portfolio optimization model

JEL Classification: G11, G12, G14, D82

Suggested Citation

Bongaerts, Dion and Rösch, Dominik and Van Dijk, Mathijs A., A Portfolio Optimization Approach to Identifying Private Information (November 30, 2014). 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

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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