Asymmetric Information and the Distribution of Trading Volume

87 Pages Posted: 3 Feb 2016 Last revised: 8 Apr 2022

See all articles by Matthijs Lof

Matthijs Lof

Aalto University

Jos van Bommel

Universite du Luxembourg - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: April 6, 2022

Abstract

We propose the Volume Coefficient of Variation (VCV), the ratio of the standard deviation to the mean of trading volume, as a new and simple measure of information asymmetry in security markets. We use a microstructure model to demonstrate that VCV is strictly increasing in the proportion of informed trade. Empirically, we obtain VCV from daily observations of trading volume and provide extensive evidence supporting the hypothesis that VCV indicates information asymmetry, by studying return reversals, institutional ownership, and extant firm-level measures of asymmetric information in the cross-section of US stocks. Moreover, VCV increases following exogenous reductions in analyst coverage induced by brokerage closures, and steeply decreases around earnings announcements and other information disclosures.

Keywords: VCV, Trading Volume, Informed Trading

JEL Classification: D82, G12, G14

Suggested Citation

Lof, Matthijs and van Bommel, Jos, Asymmetric Information and the Distribution of Trading Volume (April 6, 2022). Available at SSRN: https://ssrn.com/abstract=2726187 or http://dx.doi.org/10.2139/ssrn.2726187

Matthijs Lof (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

HOME PAGE: http://sites.google.com/site/matthijslof/

Jos Van Bommel

Universite du Luxembourg - Department of Economics ( email )

Luxembourg

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