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
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
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