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


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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    • "the Arca trading platforms. The trading model of Easley et al. (1996) has been used to determine the probability of informed trading in high versus low volume stocks to extract the information content of trade size and test various market microstructure models (Easley et al., 1997a;1997b), to analyze the effect of analysts " following (Easley et al., 1998a), to examine informed traders preferred market (Easley et al., 1998b), and to test for trading on heterogeneous prior beliefs (Brockman and Chung, 2001). To control for the informational effects specific to the NYSE and the Arca trading platforms, we include PIN (probability of informed trading), Order_Informed (order arrival rate of informed traders) and Order_Uninformed (order arrival rate of uninformed traders) in our multivariate analysis (definitions of these variables are provided in the Appendix). "
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    ABSTRACT: Chordia, Roll and Subrahmanyam (2005, CRS) estimate the speed of convergence to market efficiency based on short-horizon return predictability of the 150 largest NYSE firms. We extend CRS to a broad panel of NYSE stocks and are the first to examine the relation between electronic communication networks (ECNs) and the corresponding informational efficiency of prices. Overall, we confirm CRS's result that price adjustments to new information occur on average within 5–15 min for large NYSE stocks. We further show that it takes about 20 min longer for smaller firms to incorporate information into prices. Most importantly, we demonstrate that the speed of convergence to market efficiency is significantly related to the type of trading platform where orders are executed, even after controlling for relative order flows, trading costs, volatility, informational effects, trading conditions, market quality, institutional trading activity, and other firm-specific characteristics. Our findings provide direct answers and insights to issues raised in a recent SEC concept release document.
    Preview · Article · Sep 2012 · Journal of Empirical Finance
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    • "Fleming and Remolona (1999) find that trading volume increases significantly, while price volatility and spreads remain wide, as investors in Treasury securities trade to reconcile differential interpretations of macroeconomic information releases. Brockman and Chung (2000) find that volume is increasing in the Wang (1998) model's heterogeneity parameter on information event days, after controlling for the information effects of the announcements. Finally, in the experimental literature, Smith, Suchanek and Williams (1988) show that even when traders observe identical probabilistic dividend distributions, then trade occurs, sometimes in large volume. "
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    ABSTRACT: This paper examines the relationship between post-earnings announcement returns and different measures of volume at the earnings date. We find that post-event returns are strictly increasing in the component of volume that is unexplained by prior trading activity. We interpret unexplained volume as an indicator of opinion divergence among investors and conclude that post-event returns are increasing in ex ante opinion divergence. Our evidence is consistent with Varian [1985], who suggests that opinion divergence may be treated as an additional risk factor affecting asset prices. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2006.
    Preview · Article · Mar 2006 · Journal of Accounting Research
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    • "More generally, as shown by contributions of Wang (1998) and Brockman and Chung (2000), another interesting aspect of this study arises from the fact that in recent microstructure literature, heterogeneity is presented as a possible motive to explain investors' trading. In this context, the empirical study of factors that can potentially affect the heterogeneity, such as a regulatory authority, is interesting. "
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    ABSTRACT: An information flow over a period of time can affect the market in two ways: the value of the concerned assets and the degree of heterogeneity of investor anticipations. In this paper, we focus on the second aspect through the study of the information flow generated by European Commission interventions in the field of merger and acquisition monitoring. Our question is the following: does the information flow coming from the Directorate General of Competition create heterogeneity among investors on the market about the valuation of the concerned asset? We use a sample of 74 firms involved in 45 contested merger and acquisition operations during the years 1990 to 1999. Our methodology is based on the GARCH framework. The main result is that no systematic statistically significant increase in heterogeneity can be attributed to the activities of the European Commission. We conclude that the communication of information to the market by the Directorate General of Competition is done efficiently.
    Full-text · Article · Apr 2001 · SSRN Electronic Journal
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