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Identifying Information Asymmetry in Securities Markets

Review of Financial Studies, Forthcoming

93 Pages Posted: 16 Feb 2015 Last revised: 19 Oct 2017

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business

Kevin Crotty

Rice University

Tao Li

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Date Written: April 31, 2017

Abstract

We propose and estimate a model of endogenous informed trading that is a hybrid of the PIN and Kyle models. When an informed trader trades optimally, both returns and order flows are needed to identify information asymmetry parameters. Empirical relationships between parameter estimates and price impacts and between parameter estimates and stochastic volatility are consistent with theory. We illustrate how the estimates can be used to detect information events in the time series and to characterize the information content of prices in the cross section. We also compare the estimates to those from other models on various criteria.

Keywords: PIN, Kyle Lambda, Information Asymmetry, Order Flow

JEL Classification: D82, D83, G14

Suggested Citation

Back, Kerry and Crotty, Kevin and Li, Tao, Identifying Information Asymmetry in Securities Markets (April 31, 2017). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2565216

Kerry Back

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Kevin Crotty

Rice University ( email )

6100 Main Street
Houston, TX 77005-1892
United States

Tao Li (Contact Author)

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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