Securities Markets Where Some Investors Receive Information About Cash Flow Betas
90 Pages Posted: 1 Oct 2020 Last revised: 3 Dec 2021
Date Written: September 13, 2020
We analyze a market with private information about cash flows as well as their betas. The unique feature of beta information is that it multiplicatively affects cash flow volatility conditional on order flows. This aspect, together with market makers' risk aversion and betas' non-negativity, implies a buy-sell asymmetry in the price impact function, and a positive covariance between stochastic price impacts and order flows. We predict a negative relation between this covariance and expected returns, and an attenuation of the beta anomaly in asset returns net of this relation. Empirical tests confirm these predictions.
Keywords: Beta information, price impact, asset prices
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation