Why is PIN Priced?

44 Pages Posted: 21 Mar 2007  

Jefferson Duarte

Rice University

Lance A. Young

University of Washington - Department of Finance and Business Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 18, 2007

Abstract

Recent empirical work suggests that a proxy for the probability of informed trading (PIN) is an important determinant of the cross-section of average returns. This paper examines whether PIN is priced because of information asymmetry or because of other liquidity effects that are unrelated to information asymmetry. Our starting point is a model that decomposes PIN into two components, one related to asymmetric information and one related to illiquidity. In a two-pass Fama-MacBeth regression, we show that the PIN component related to asymmetric information is not priced, while the PIN component related to illiquidity is priced. We conclude, therefore, that liquidity effects unrelated to information asymmetry explain the relation between PIN and the cross-section of expected returns.

Keywords: Liquidity, Information Asymmetry

JEL Classification: G12, G14

Suggested Citation

Duarte, Jefferson and Young, Lance A., Why is PIN Priced? (May 18, 2007). Available at SSRN: https://ssrn.com/abstract=971197 or http://dx.doi.org/10.2139/ssrn.971197

Jefferson Duarte (Contact Author)

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713.3486137 (Phone)

Lance A. Young

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

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