Informed Trading and Expected Returns
Working Paper 18680
DOI 10.3386/w18680
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Does information asymmetry affect the cross-section of expected stock returns? We explore this question using representative portfolio holdings data from the Shanghai Stock Exchange. We show that institutional investors have a strong information advantage, and that past aggressiveness of institutional trading in a stock positively predicts institutions' future information advantage in this stock. Sorting stocks on this predictor and controlling for other correlates of expected returns, we find that the top quintile's average annualized return in the next month is 10.8% higher than the bottom quintile's, indicating that information asymmetry increases expected returns.
Non-Technical Summaries
- Stocks with the greatest information asymmetry have annualized returns that are 10.8 percentage points higher than stocks with the least...