Is Information Risk a Determinant of Asset Returns?

David Easley (), Soeren Hvidkjaer and Maureen O'Hara
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Soeren Hvidkjaer: University of Maryland
Maureen O'Hara: Cornell University,

Journal of Finance, 2002, vol. 57, issue 5, pages 2185-2221

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. Copyright The American Finance Association 2002.

Date: 2002
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