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Momentum and asymmetric information

Momentum and asymmetric information Purpose – The purpose of this paper is to examine the implications of asymmetric information for price evolution and investor behavior under a rational expectations framework. Design/methodology/approach – The author presents a simple asymmetric information‐based asset‐pricing model to show that private information and its revelation can generate price momentum. To empirically test this implication of the model, Easley et al. 's probability of information‐based trade (PIN) is used as a proxy for private information. Findings – High PIN firms are found to have larger magnitudes of momentum effect even after controlling for size. The abnormal returns are both economically and statistically significant, and cannot be explained by the Fama‐French factors. Originality/value – This study provides both an information‐based theory to explain the momentum anomaly and empirical support for the theory. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Momentum and asymmetric information

China Finance Review International , Volume 2 (3): 23 – Jun 8, 2012

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Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/20441391211231015
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine the implications of asymmetric information for price evolution and investor behavior under a rational expectations framework. Design/methodology/approach – The author presents a simple asymmetric information‐based asset‐pricing model to show that private information and its revelation can generate price momentum. To empirically test this implication of the model, Easley et al. 's probability of information‐based trade (PIN) is used as a proxy for private information. Findings – High PIN firms are found to have larger magnitudes of momentum effect even after controlling for size. The abnormal returns are both economically and statistically significant, and cannot be explained by the Fama‐French factors. Originality/value – This study provides both an information‐based theory to explain the momentum anomaly and empirical support for the theory.

Journal

China Finance Review InternationalEmerald Publishing

Published: Jun 8, 2012

Keywords: Assets; Prices; Assets management; Investors; Momentum effect; Asymmetric information; Rational expectations; Probability of information‐based trade

References