Asymmetric Information and the Distribution of Trading Volume
42 Pages Posted: 3 Feb 2016 Last revised: 18 Nov 2017
Date Written: November 17, 2017
We propose the Volume Coefficient of Variation (VCV), the ratio of the standard deviation to the mean of trading volume, as a new and easily computable measure of information asymmetry in security markets. We use a simple microstructure model to demonstrate that VCV is strictly increasing in the proportion of informed trade. Empirically, we find that firm-year observations of VCV, computed from daily trading volumes, are correlated with extant firm-level measures of asymmetric information in the cross-section of US stocks. Moreover, VCV increases following exogenous disruptions in analyst coverage, while VCV initially increases and then steeply decreases around earnings announcements.
Keywords: VCV, Trading volume, Informed trading
JEL Classification: D82, G12, G14
Suggested Citation: Suggested Citation