Events

Authors:

• Chuan Yang Hwang
  Nanyang Technological University

• Xiaolin Qian
  Nanyang Technological University

We develop an information risk measure that is based on the price discovery of large trades. This measure and its estimation are motivated as follows. First, stocks with more informed trading have greater price discovery in their trade prices. Second, informed traders prefer to trade in large sizes. This means that price discovery of large trades would yield a more precise measure of the information risk than would price discovery of small trades. Third, as the price series of large trades and small trades are co‐integrated, the price discovery of large trades can be easily estimated via the vector error‐correction model. Using this new measure, we show that information risk is priced. We further show that rather than being a manifestation of liquidity effect as some have argued for the case of PIN, the pricing impact of our information risk measure subsumes those of PIN and Amihud's ILLIQ. These results not only demonstrate the superiority of our information risk measure over PIN, but also suggest that the liquidity effect captured by ILLIQ has its origin in the information asymmetry.