Information Asymmetry, Market State, and Implementation Risk

Abstract This study demonstrates that the information risk premium is strongly dependent on the state of the market. Stocks with high information asymmetry, as measured by the probability of informed trading (PIN) or adjusted PIN (ADJPIN), exhibit higher returns than stocks with low information risk when the market is in a good state, but this is not the case when the market is bad. Further analysis reveals that the information risk premium is high when the implementation risk is low, suggesting that uninformed traders require high compensation from informed traders if the informed can easily arbitrage by exploiting the information advantage.