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Informed trade and idiosyncratic return variation

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  • Moonsoo Kang
  • Kiseok Nam

Abstract

This paper explores the role of private information on idiosyncratic return variation. We suggest that there is a significant positive relationship between informed trade and firm-specific return variation. Using the probability of information-based trading (PIN) as a measure of informed trade, we find that the PIN is positively related to idiosyncratic return variation in both the level and the first-difference. The results imply that firm-specific return variation is induced by informed trade through information flow on price formation. Especially, we find a strong interaction effect between informed trade and trading volume. The impact of informed trade on firm-specific return variation is more profound for stocks with a high trading volume than for stocks with a low trading volume. The result suggests that trading activity plays an important role in the information revelation. The results of various robustness checks confirm that informed trade is an important determinant of idiosyncratic return variation. Copyright Springer Science+Business Media New York 2015

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  • Moonsoo Kang & Kiseok Nam, 2015. "Informed trade and idiosyncratic return variation," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 551-572, April.
    • Handle: RePEc:kap:rqfnac:v:44:y:2015:i:3:p:551-572
    DOI: 10.1007/s11156-013-0417-1
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    More about this item

    Keywords

    Price informativeness; Idiosyncratic return variation; Informed trade; R-square; Trading volume; Probability of information-based trading (PIN); G10; G14;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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