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Factoring Information into Returns

Published online by Cambridge University Press:  19 February 2010

David Easley ,
Soeren Hvidkjaer  and
Maureen O’Hara
David Easley
Affiliation:
Department of Economics, Cornell University, 450 Uris Hall, Ithaca, NY 14853. dae3@cornell.edu
Soeren Hvidkjaer
Affiliation:
Copenhagen Business School, Solbjerg Plads 3, 2000 Frederiksberg, Denmark. sh.fi@cbs.dk
Maureen O’Hara
Affiliation:
Johnson Graduate School of Management, Cornell University, 447 Sage Hall, Ithaca, NY 14853. mo19@cornell.edu
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Abstract

We examine the potential profits of trading on a measure of private information (PIN) in a stock. A zero-investment portfolio that is size-neutral but long in high PIN stocks and short in low PIN stocks earns a significant abnormal return. The Fama-French, momentum, and liquidity factors do not explain this return. However, significant covariation in returns exists among high PIN stocks and among low PIN stocks, suggesting that PIN might proxy for an underlying factor. We create a PIN factor as the monthly return on the zero-investment portfolio above and show that it is successful in explaining returns to independent PIN-size portfolios. We also show that it is robust to inclusion of the Pástor-Stambaugh liquidity factor and the Amihud illiquidity factor. We argue that information remains an important determinant of asset returns even in the presence of these additional factors.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 2 , April 2010 , pp. 293 - 309
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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