Asymmetric Information and the Distribution of Trading Volume

67 Pages Posted: 22 Jan 2018 Last revised: 28 Jan 2018

See all articles by Matthijs Lof

Matthijs Lof

Aalto University

Jos van Bommel

Luxembourg School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2018

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 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 reductions in analyst coverage induced by brokerage closures, and steeply decreases around earnings announcements.

Keywords: Volume Coefficient of Variation (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 (January 22, 2018). Bank of Finland Research Discussion Paper No. 1/2018, Available at SSRN: https://ssrn.com/abstract=3106595

Matthijs Lof

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

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

Jos Van Bommel (Contact Author)

Luxembourg School of Finance ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

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