Informed Trading, Order Flow Shocks and the Cross-section of Expected Returns in Borsa İstanbul

Applied Economics, Forthcoming

26 Pages Posted: 12 Oct 2019

Date Written: September 29, 2019

Abstract

This paper examines the relationship between information asymmetry and stock returns in Borsa İstanbul. For all stocks that are traded in Borsa İstanbul between March 2005 and April 2017, we estimate the probability of informed trading (PIN) by Duarte and Young (2009) factorization and a grid-search algorithm similar to Yan and Zhang (2012). Firm level cross-sectional regressions indicate a statistically insignificant relationship between PIN estimates and future returns. Moreover, univariate and multivariate portfolio analyses assert that investors that hold stocks that have high information asymmetry do not obtain significant future returns. Consequently, our results suggest that information asymmetry proxied by PIN is a firm-specific risk and can be eliminated with portfolio diversification. Findings are robust to different factorization in estimating PIN and free of any bias due to trade classification algorithms, boundary solutions, floating point exceptions and systematic order flow shocks.

Keywords: Information Asymmetry, Market Microstructure, Borsa İstanbul, Asset Pricing

JEL Classification: G12, G14

Suggested Citation

Tiniç, Murat and Salih, Aslıhan, Informed Trading, Order Flow Shocks and the Cross-section of Expected Returns in Borsa İstanbul (September 29, 2019). Applied Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3461411

Murat Tiniç (Contact Author)

Kadir Has University ( email )

Istanbul
Turkey

Aslıhan Salih

TED University ( email )

Ziya Gokalp Bulvari No: 48
Kolej Çankaya, Ankara 06420
Turkey

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