Asymmetric Impact of Informed Trading Activity on Stock Return Volatility
Affiliation(s)
Department of Information Management and Finance, National Chiao Tung University, Hsinchu City, Taiwan. College of Management, Yuan Ze University, Chung-Li City, Taiwan.
Department of Information Management and Finance, National Chiao Tung University, Hsinchu City, Taiwan. College of Management, Yuan Ze University, Chung-Li City, Taiwan.
ABSTRACT
Prior research has shown that informed trading activity decreases the stock return volatility because trading causes stock prices to converge to fundamentals. On the contrary to existing studies, this paper documents the empirical asymmetric relation between informed trading activity and volatility. Stocks with relatively less private information are associated with lower participation of informed traders, and an increase in informed trading activity for those stocks would increase their return volatility. This finding is robust under both pooled and Fama-MacBeth regressions with various constructions for the realized volatility and probability of informed trading measurements.
Cite this paper
Huang, A. and Chang, C. (2014) Asymmetric Impact of Informed Trading Activity on Stock Return Volatility. Theoretical Economics Letters, 4, 568-573. doi: 10.4236/tel.2014.47071.
Huang, A. and Chang, C. (2014) Asymmetric Impact of Informed Trading Activity on Stock Return Volatility. Theoretical Economics Letters, 4, 568-573. doi: 10.4236/tel.2014.47071.
References
[1] French, K.R. and Roll, R. (1986) Stock Return Variances: The Arrival of Information and Reaction of Traders. Journal of Financial Economics, 17, 5-26. http://dx.doi.org/10.1016/0304-405X(86)90004-8 [2] Glosten, L.R., Jagannathan, R. and Runkle, D.E. (1993) On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. Journal of Finance, 48, 1779-1801. http://dx.doi.org/10.1111/j.1540-6261.1993.tb05128.x [3] Huang, A.Y. (2011) Volatility Modeling by Asymmetrical Quadratic Effect with Diminishing Marginal Impact. Computational Economics, 37, 301-330. http://dx.doi.org/10.1007/s10614-011-9254-2 [4] Chordia, T., Roll, R. and Subrahmanyam, A. (2008) Liquidity and Market Efficiency. Journal of Financial Economics, 87, 249-268. http://dx.doi.org/10.1016/j.jfineco.2007.03.005 [5] Avramov, D., Chordia, T. and Goyal, A. (2006) The Impact of Trades on Daily Volatility. Review of Financial Studies, 19, 1241-1277. http://dx.doi.org/10.1093/rfs/hhj027 [6] Vega, C. (2006) Stock Price Reaction to Public and Private Information. Journal of Financial Economics, 82, 101-133. http://dx.doi.org/10.1016/j.jfineco.2005.07.011 [7] Foster, F.D. and Viswanathan, S. (1994) Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information. Journal of Financial and Quantitative Analysis, 29, 499-518.
http://dx.doi.org/10.2307/2331107 [8] Aslan, H., Easley, D., Hvidkjaer, S. and O’Hara, M. (2011) The Characteristics of Informed Trading: Implications for Asset Pricing. Journal of Empirical Finance, 18, 782-801.
http://dx.doi.org/10.1016/j.jempfin.2011.08.001 [9] Fleming, M.J. and Remolona, E.M. (2002) Price Formation and Liquidity in the US Treasury Market: The Response to Public Information. Journal of Finance, 54, 1901-1915. http://dx.doi.org/10.1111/0022-1082.00172 [10] Durnev, A., Morck, R. and Yeung, B. (2005) Value Enhancing Capital Budgeting and Firm-Specific Stock Return Variation. Journal of Finance, 59, 65-105.
http://dx.doi.org/10.1111/j.1540-6261.2004.00627.x [11] Kim, O. and Verrecchia, R. (1997) Pre-Announcement and Event-Period Private Information. Journal of Accounting and Economics, 24, 395-419. http://dx.doi.org/10.1016/S0165-4101(98)00013-5 [12] Easley, D., Hvidkjaer, S. and O’Hara, M. (2002) Is Information Risk a Determinant of Asset Returns? Journal of Finance, 57, 2185-2221. http://dx.doi.org/10.1111/1540-6261.00493 [13] Andersen, T.G., Bollerslev, T., Diebold, F.X. and Ebens, H. (2001) The Distribution of Realized Stock Return Volatility. Journal of Financial Economics, 61, 43-76.
http://dx.doi.org/10.1016/S0304-405X(01)00055-1 [14] Hansen, B.E. (2000) Sample Splitting and Threshold Estimation. Econometrica, 68, 575-603.
http://dx.doi.org/10.1111/1468-0262.00124
[1] French, K.R. and Roll, R. (1986) Stock Return Variances: The Arrival of Information and Reaction of Traders. Journal of Financial Economics, 17, 5-26. http://dx.doi.org/10.1016/0304-405X(86)90004-8 [2] Glosten, L.R., Jagannathan, R. and Runkle, D.E. (1993) On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks. Journal of Finance, 48, 1779-1801. http://dx.doi.org/10.1111/j.1540-6261.1993.tb05128.x [3] Huang, A.Y. (2011) Volatility Modeling by Asymmetrical Quadratic Effect with Diminishing Marginal Impact. Computational Economics, 37, 301-330. http://dx.doi.org/10.1007/s10614-011-9254-2 [4] Chordia, T., Roll, R. and Subrahmanyam, A. (2008) Liquidity and Market Efficiency. Journal of Financial Economics, 87, 249-268. http://dx.doi.org/10.1016/j.jfineco.2007.03.005 [5] Avramov, D., Chordia, T. and Goyal, A. (2006) The Impact of Trades on Daily Volatility. Review of Financial Studies, 19, 1241-1277. http://dx.doi.org/10.1093/rfs/hhj027 [6] Vega, C. (2006) Stock Price Reaction to Public and Private Information. Journal of Financial Economics, 82, 101-133. http://dx.doi.org/10.1016/j.jfineco.2005.07.011 [7] Foster, F.D. and Viswanathan, S. (1994) Strategic Trading with Asymmetrically Informed Traders and Long-Lived Information. Journal of Financial and Quantitative Analysis, 29, 499-518.
http://dx.doi.org/10.2307/2331107 [8] Aslan, H., Easley, D., Hvidkjaer, S. and O’Hara, M. (2011) The Characteristics of Informed Trading: Implications for Asset Pricing. Journal of Empirical Finance, 18, 782-801.
http://dx.doi.org/10.1016/j.jempfin.2011.08.001 [9] Fleming, M.J. and Remolona, E.M. (2002) Price Formation and Liquidity in the US Treasury Market: The Response to Public Information. Journal of Finance, 54, 1901-1915. http://dx.doi.org/10.1111/0022-1082.00172 [10] Durnev, A., Morck, R. and Yeung, B. (2005) Value Enhancing Capital Budgeting and Firm-Specific Stock Return Variation. Journal of Finance, 59, 65-105.
http://dx.doi.org/10.1111/j.1540-6261.2004.00627.x [11] Kim, O. and Verrecchia, R. (1997) Pre-Announcement and Event-Period Private Information. Journal of Accounting and Economics, 24, 395-419. http://dx.doi.org/10.1016/S0165-4101(98)00013-5 [12] Easley, D., Hvidkjaer, S. and O’Hara, M. (2002) Is Information Risk a Determinant of Asset Returns? Journal of Finance, 57, 2185-2221. http://dx.doi.org/10.1111/1540-6261.00493 [13] Andersen, T.G., Bollerslev, T., Diebold, F.X. and Ebens, H. (2001) The Distribution of Realized Stock Return Volatility. Journal of Financial Economics, 61, 43-76.
http://dx.doi.org/10.1016/S0304-405X(01)00055-1 [14] Hansen, B.E. (2000) Sample Splitting and Threshold Estimation. Econometrica, 68, 575-603.
http://dx.doi.org/10.1111/1468-0262.00124