Cross-Sectional Identification of Informed Trading
Event details
| Date | 01.05.2015 |
| Hour | 12:00 › 13:00 |
| Speaker | Dion BONGAERTS (Erasmus University, Rotterdam School of Management) |
| Location | |
| Category | Conferences - Seminars |
We propose a new approach to measuring informed trading in individual securities based on a portfolio optimization model for investors facing information and liquidity shocks. These shocks induce speculative and liquidity-motivated order flow, taking into account the price impact of trading. The model allows us to back out the amount of informed trading from a security's aggregate order flow, based on the cross-section of price impact parameters and order imbalances (OIB). Furthermore, we obtain a very simple expression for a security's aggregate private information shock, in excess of the same term for a benchmark security that is insulated from informed trading. We validate our private information measure (based on daily data for all S&P 1500 stocks over 2001-2010) by showing that it is strongly related to contemporaneous returns, and that return reversals are significantly weaker following stock-days with high private information estimates.
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Practical information
- Informed public
- Free