TI Complexity in Economics Seminars

Speaker(s)
Matthijs Lof (Aalto University, Finland)
Date
Wednesday, 14 September 2016
Location
Amsterdam

We use the Kyle (1985) model to characterize the distribution of trading volume as a function of the proportion of informed trade. If most orders are submitted by uninformed traders and are hence uncorrelated, order imbalance is small compared to observed trading volume, and the distribution of trading volume resembles a Normal distribution. On the other hand, if most orders are correlated because they are submitted by informed traders, the order imbalance is large and needs to be absorbed by market makers. The trading volume distribution is in this case more skewed and has a higher coefficient of variation (ratio of standard deviation to mean). We find that the volume coefficient of variation (VCV) is highly correlated to alternative measures indicative of informed trading in the cross section of stocks. Moreover, the VCV sharply decreases after earnings announcements, which resolve information asymmetries. Finally, the post earnings announcement drift is stronger for stocks with a low VCV prior to the announcement.