Article

An empirical investigation of trading on asymmetric information and heterogeneous prior beliefs

Department of Accountancy, Faculty of Business and Information Systems, Hong Kong Polytechnic University, Hung Hom Kowloon, Hong Kong, People's Republic of China
Journal of Empirical Finance (Impact Factor: 0.84). 12/2000; 7(5):417-454. DOI: 10.1016/S0927-5398(00)00020-7

ABSTRACT The purpose of this study is to identify and analyze inter-temporal trading patterns attributable to informed trading. Recent theoretical models posit that heterogeneous prior beliefs provide a source of trading volume in addition to the commonly accepted trading motives of liquidity and asymmetric information. After separating informed from uninformed trading using the estimation procedure of Easley et al. [Journal of Finance 51 (1996) 1405], we test for the presence of trading on heterogeneous beliefs as opposed to asymmetric information. The empirical findings confirm the existence of trading on heterogeneous prior beliefs and generally support the inter-temporal patterns proposed by Wang [Journal of Financial Markets 1 (1998) 321].

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