Is Information Risk a Determinant of Asset Returns?


  • David Easley,

  • Soeren Hvidkjaer,

  • Maureen O'Hara

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    • Cornell University, University of Maryland, and Cornell University. The authors would like to thank Anat Admati; Yakov Amihud; Kerry Back; Patrick Bolton; Douglas Diamond; Ken French; William Gebhardt; Gordon Gemmill; Mark Grinblatt; Campbell Harvey; David Hirshleifer; Schmuel Kandell; Charles Lee; Bhaskaran Swaminathan; Zhenyu Wang; Ingrid Werner; two referees; the editor (René Stulz); and seminar participants at Cornell University, DePaul University, the Federal Reserve Bank of Chicago, Georgia State University, the Hong Kong University of Science and Technology, INSEAD, the Massachusetts Institute of Technology, Princeton University, the Red Sea Finance Conference, the Stockholm School of Economics, Washington University, the University of Chicago, the University of Essex, the Western Finance Association meetings, and the European Finance Association meetings for helpful comments. We are also grateful to Marc Lipson for providing us with data compaction programs.


We investigate the role of information-based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information-based trading, and we estimate this measure using data for individual NYSE-listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French (1992) asset-pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information-based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year.