Informed trade and idiosyncratic return variation

Moonsoo Kang () and Kiseok Nam ()

Review of Quantitative Finance and Accounting, 2015, vol. 44, issue 3, 572 pages

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

Keywords: Price informativeness; Idiosyncratic return variation; Informed trade; R-square; Trading volume; Probability of information-based trading (PIN); G10; G14 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11156-013-0417-1

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