Informed trading, order flow shocks and the cross section of expected returns in Borsa Istanbul

Murat Tiniç; Aslıhan Salih

doi:10.1080/00036846.2019.1676386

Informed trading, order flow shocks and the cross section of expected returns in Borsa Istanbul

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

This paper examines the relationship between information asymmetry and stock returns in Borsa Istanbul. For all stocks that are traded in Borsa Istanbul between March 2005 and April 2017, we estimate the probability of informed trading (PIN) to proxy for information asymmetry. Firm-level cross-sectional regressions indicate a statistically insignificant relationship between PIN estimates and future returns. Moreover, univariate and multivariate portfolio analyses assert that investors that hold stocks that have high information asymmetry do not obtain significant future returns. Consequently, our results suggest that information asymmetry proxied by PIN is a firm-specific risk and can be eliminated with portfolio diversification. Findings are robust to different factorizations in estimating PIN and free of any bias due to trade classification algorithms, boundary solutions, floating-point exceptions and symmetric order flow shocks.

Original language	English
Pages (from-to)	1446-1459
Journal	Applied Economics
Volume	52
Issue number	13
DOIs	https://doi.org/10.1080/00036846.2019.1676386
Publication status	Published - 15 Mar 2020
Externally published	Yes

Funding

We thank Nuray Guner, Levent Akdeniz, Tanseli Savaser, Basak Tanyeri, Oguz Ersan and participants of Turkish Finance Workshop at Middle East Technical University, 18th Workshop on Quantitative Finance at Universita degli Studi di Milano, Summer School on Market Microstructure at Universita della Svizzera Italiana, Workshop on Market Microstructure and Behavioural Finance at Istanbul Technical University for helpful comments and suggestions. Authors gratefully acknowledge the financial support provided by the Scientific and Technological Research Council of Turkey (TUBITAK), Grant Number: 116K335. This research is conducted as a part of Tiniç’s Ph.D. Thesis at Bilkent University, Faculty of Business Administration. This work was supported by the The Scientific and Technological Research Council of Turkey (TUBITAK) [116K335]. We thank Nuray Guner, Levent Akdeniz, Tanseli Savaser, Basak Tanyeri, Oguz Ersan and participants of Turkish Finance Workshop at Middle East Technical University, 18th Workshop on Quantitative Finance at Universita degli Studi di Milano, Summer School on Market Microstructure at Universita della Svizzera Italiana, Workshop on Market Microstructure and Behavioural Finance at Istanbul Technical University for helpful comments and suggestions. Authors gratefully acknowledge the financial support provided by the Scientific and Technological Research Council of Turkey (TUBITAK), Grant Number: 116K335. This research is conducted as a part of Tini??s Ph.D. Thesis at Bilkent University, Faculty of Business Administration.

Funders	Funder number
TUBITAK
UniversitÃ degli Studi di Milano
Türkiye Bilimsel ve Teknolojik Araştırma Kurumu	116K335

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abstract = "This paper examines the relationship between information asymmetry and stock returns in Borsa Istanbul. For all stocks that are traded in Borsa Istanbul between March 2005 and April 2017, we estimate the probability of informed trading (PIN) to proxy for information asymmetry. Firm-level cross-sectional regressions indicate a statistically insignificant relationship between PIN estimates and future returns. Moreover, univariate and multivariate portfolio analyses assert that investors that hold stocks that have high information asymmetry do not obtain significant future returns. Consequently, our results suggest that information asymmetry proxied by PIN is a firm-specific risk and can be eliminated with portfolio diversification. Findings are robust to different factorizations in estimating PIN and free of any bias due to trade classification algorithms, boundary solutions, floating-point exceptions and symmetric order flow shocks.",

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AB - This paper examines the relationship between information asymmetry and stock returns in Borsa Istanbul. For all stocks that are traded in Borsa Istanbul between March 2005 and April 2017, we estimate the probability of informed trading (PIN) to proxy for information asymmetry. Firm-level cross-sectional regressions indicate a statistically insignificant relationship between PIN estimates and future returns. Moreover, univariate and multivariate portfolio analyses assert that investors that hold stocks that have high information asymmetry do not obtain significant future returns. Consequently, our results suggest that information asymmetry proxied by PIN is a firm-specific risk and can be eliminated with portfolio diversification. Findings are robust to different factorizations in estimating PIN and free of any bias due to trade classification algorithms, boundary solutions, floating-point exceptions and symmetric order flow shocks.

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Informed trading, order flow shocks and the cross section of expected returns in Borsa Istanbul

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