Information Precision, Noise, and the Cross-Section of Stock Returns

Burlacu, Radu; Fontaine, Patrice; Jimenez-Garcès, Sonia; Seasholes, Mark S.

doi:10.2139/ssrn.1361283

Cited by 2 publications

(1 citation statement)

References 59 publications

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“…Therefore, in a nonrevealing equilibrium, lower prices are required for investors to hold securities about which they are uninformed. Several empirical studies have tested this theoretical prediction for the equity market and found that the higher degree of informed trading leads to lower current stock prices, and hence higher returns (e.g., Easley et al 2002Easley et al , 2010Burlacu et al 2008). One noticeable exception is Duarte and Young (2009), who find that liquidity, rather than information asymmetry, is priced in the cross section of stock returns.…”

Section: Introductionmentioning

confidence: 99%

Informed Bond Trading, Corporate Yield Spreads, and Corporate Default Prediction

Han

Zhou

2014

Management Science

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T aking advantage of recently augmented corporate bond transaction data, we examine the pricing implications of informed trading in corporate bonds and its ability to predict corporate defaults. We find that microstructure measures of information asymmetry seem to capture adverse selection in corporate bond trading reasonably well. We demonstrate that information asymmetry in bond trading has explanatory power for corporate bond yield spreads, and this result holds after controlling for the transaction costs of liquidity, credit risk, and other traditional bond pricing factors. Furthermore, information asymmetry can help forecast corporate defaults after conditioning on other default prediction variables. Such forecasting ability of informed bond trading is especially useful for private firms because the bond market constitutes the only venue for informed traders to exploit their information advantages.

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