Asymmetric Information and the Distribution of Trading Volume

We propose the coefficient of variation (ratio of standard deviation to mean) of trading volume, VCV, as a new and easily computable measure of information asymmetry in security markets. We derive from a simple microstructure model that VCV is an increasing function of the proportion of informed trade. Simulations confirm this result under more general assumptions. Empirically, we find that VCV is highly correlated to extant measures of asymmetric information in the cross-section of US stocks. Moreover, VCV sharply decreases after earnings announcements resolve information asymmetries.

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