NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Informed Trading and Expected Returns

James J. Choi, Li Jin, Hongjun Yan

NBER Working Paper No. 18680
Issued in January 2013, Revised in August 2016
NBER Program(s):Asset Pricing

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.

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Document Object Identifier (DOI): 10.3386/w18680

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