Informed Trading, Information Asymmetry, and Pricing of Information Risk: Empirical Evidence from the NYSE

We analyze commonality in informed trading across stocks, and how informed trading varies with the structural and trading characteristics of a firm. We thereby isolate the residual level of informed trading that is unrelated to commonality, trading characteristics, and structural charac-teristics and analyze this measure with respect to its characteristics and pricing relevance. We find evidence of commonality in informed trading, and a systematic dependence of the level of informed trading on firm characteristics, such as, tick size, the existence of options, and the size of the ownership stake of outside parties. Most importantly, we find that the residual level of in-formed trading is the component of informed trading most strongly related to required returns. This indicates that an important part of the information risk premium is related to the inability to differentiate between price fluctuations that are caused by changes in fundamental value from random price moves.