Asymmetric Information and the Distribution of Trading Volume

38 Pages Posted: 3 Feb 2016 Last revised: 1 Jul 2017

Matthijs Lof

Aalto University

Jos van Bommel

Luxembourg School of Finance

Date Written: June 30, 2017

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 easily computable measure of informationasymmetryinsecuritymarkets. Weuseasimplemicrostructuremodelto 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, from trading volumes around earnings announcement dates, we find that VCV steeply decreases after potential information asymmetries are resolved.

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 (June 30, 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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