The Noninformation Cost of Trading and Its Relative Importance in Asset Pricing

Review of Asset Pricing Studies, Forthcoming

59 Pages Posted: 2 Aug 2015 Last revised: 11 Feb 2016

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Sahn-Wook Huh

State University of New York (SUNY) - Department of Finance

Date Written: February 10, 2016

Abstract

We show that the noninformation component of trading costs is priced in the cross-section of stock returns using intraday data for NYSE/AMEX stocks. More importantly, we show that the noninformation component is much larger and more strongly related to stock returns than is the adverse-selection component, indicating that the noninformation component plays a more important role in asset pricing than does the adverse-section component. We conduct a variety of robustness tests and show that our main results hold for different estimation methods, measures of the adverse-selection cost, subsample periods, and control variables. We offer plausible explanations for these results.

Keywords: Order Flows, Lee-Ready Method, Holden-Jacobsen Algorithm, Trading Costs, Order-Processing Cost, Inventory-Holding Cost, Non-Information Cost, Information Asymmetry, Adverse-Section Cost, Asset Pricing, Equilibrium Returns

JEL Classification: G12

Suggested Citation

Chung, Kee H. and Huh, Sahn-Wook, The Noninformation Cost of Trading and Its Relative Importance in Asset Pricing (February 10, 2016). Review of Asset Pricing Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2638442 or http://dx.doi.org/10.2139/ssrn.2638442

Kee H. Chung (Contact Author)

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

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Sahn-Wook Huh

State University of New York (SUNY) - Department of Finance ( email )

347 Jacobs Management Center
Buffalo, 14260-4000
United States
716-645-5435 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://www.acsu.buffalo.edu/~swhuh/

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