Is Information Risk a Determinant of Asset Returns?
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- 1 October 2002
- journal article
- Published by Wiley in The Journal of Finance
- Vol. 57 (5) , 2185-2221
- https://doi.org/10.1111/1540-6261.00493
Abstract
We investigate the role of information‐based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information‐based trading, and we estimate this measure using data for individual NYSE‐listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French (1992) asset‐pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information‐based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year.Keywords
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