Asymmetric Information and the Distribution of Trading Volume

35 Pages Posted: 3 Feb 2016 Last revised: 25 Mar 2017

Matthijs Lof

Aalto University

Jos van Bommel

Luxembourg School of Finance

Date Written: March 24, 2017

Abstract

We propose the coefficient of variation (ratio of standard deviation to mean) of trading volume, VCV, as a new and easily computable measure of information asymmetry in security markets. We derive from a simple microstructure model that VCV is an increasing function of the proportion of informed trade. Simulations confirm this result under more general assumptions. Empirically, we find that VCV is highly correlated to extant measures of asymmetric information in the cross-section of US stocks. Moreover, VCV sharply decreases after earnings announcements resolve information asymmetries.

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 (March 24, 2017). Available at SSRN: https://ssrn.com/abstract=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

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

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