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
Date Written: February 10, 2016
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: Suggested Citation