Asymmetric Information and the Distribution of Trading Volume
67 Pages Posted: 22 Jan 2018 Last revised: 28 Jan 2018
Date Written: January 22, 2018
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: Suggested Citation