Time-Varying Informed and Uninformed Trading Activities

45 Pages Posted: 13 Apr 2004

See all articles by Qin Lei

Qin Lei

University of Michigan at Ann Arbor

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Date Written: April 10, 2004

Abstract

We develop a framework to investigate time-varying informed and uninformed trading activities and the relationship between them. Informed traders may match the level of the uninformed arrival rate with certain probability so as to make better use of the camouflage provided by the uninformed trades.

Our empirical estimation of 40 NYSE stocks shows that the buy and sell arrival rates of the uninformed traders are different and time-varying. Uninformed traders tend to adopt contrarian strategy in reaction to high prior stock returns, but employ momentum strategy in reaction to high prior market returns. The estimated probability of matching response ranges from 0.72 to 0.98, reflecting that informed traders are taking good advantage of the camouflage provided by the uninformed traders. The estimated time-varying probability of informed trading is a good predictor for various measures of bid-ask spreads, and is a better measure of information asymmetry than several existing measures.

Keywords: information asymmetry, informed trading, uninformed trading, trading behavior

JEL Classification: G14, G15

Suggested Citation

Lei, Qin and Wu, Guojun, Time-Varying Informed and Uninformed Trading Activities (April 10, 2004). Available at SSRN: https://ssrn.com/abstract=529043 or http://dx.doi.org/10.2139/ssrn.529043

Qin Lei

University of Michigan at Ann Arbor ( email )

Ross School of Business
701 Tappan Street
Ann Arbor, MI 48109-1234
United States

HOME PAGE: http://leiq.bus.umich.edu

Guojun Wu (Contact Author)

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)

HOME PAGE: http://www.bauer.uh.edu/wu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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