Why does public news augment information asymmetries?

Research output: Contribution to journalArticleScientificpeer-review

Abstract

The arrival of a public signal worsens the adverse selection problem if informed
investors are risk-averse. Precisely, the public signal reduces uncertainty which
boosts informed investors’ participation leading to a more toxic order flow. I confirm the model’s empirical predictions by estimating the effect of the publication of the weekly change in oil inventories on liquidity via a difference-in-differences strategy. I show that the mean bid-ask spread doubles immediately after the release and volume increases by 32 percent regardless of the report’s content. Further, in line with the model, implied volatility drops and insider’s trading increase after the report’s publication.
Original languageEnglish
JournalJournal of Financial Economics
Publication statusAccepted/In press - Jun 2019

Fingerprint

Information asymmetry
News
Adverse selection
Uncertainty
Prediction
Participation
Investors
Implied volatility
Order flow
Difference-in-differences
Liquidity
Empirical model
Risk-averse
Bid/ask spread
Oil
Insider trading

Keywords

  • public information
  • news release
  • asymmetric information
  • liquidity

Cite this

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title = "Why does public news augment information asymmetries?",
abstract = "The arrival of a public signal worsens the adverse selection problem if informedinvestors are risk-averse. Precisely, the public signal reduces uncertainty whichboosts informed investors’ participation leading to a more toxic order flow. I confirm the model’s empirical predictions by estimating the effect of the publication of the weekly change in oil inventories on liquidity via a difference-in-differences strategy. I show that the mean bid-ask spread doubles immediately after the release and volume increases by 32 percent regardless of the report’s content. Further, in line with the model, implied volatility drops and insider’s trading increase after the report’s publication.",
keywords = "public information, news release, asymmetric information, liquidity",
author = "Julio Crego",
year = "2019",
month = "6",
language = "English",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier Science",

}

Why does public news augment information asymmetries? / Crego, Julio.

In: Journal of Financial Economics, 06.2019.

Research output: Contribution to journalArticleScientificpeer-review

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N2 - The arrival of a public signal worsens the adverse selection problem if informedinvestors are risk-averse. Precisely, the public signal reduces uncertainty whichboosts informed investors’ participation leading to a more toxic order flow. I confirm the model’s empirical predictions by estimating the effect of the publication of the weekly change in oil inventories on liquidity via a difference-in-differences strategy. I show that the mean bid-ask spread doubles immediately after the release and volume increases by 32 percent regardless of the report’s content. Further, in line with the model, implied volatility drops and insider’s trading increase after the report’s publication.

AB - The arrival of a public signal worsens the adverse selection problem if informedinvestors are risk-averse. Precisely, the public signal reduces uncertainty whichboosts informed investors’ participation leading to a more toxic order flow. I confirm the model’s empirical predictions by estimating the effect of the publication of the weekly change in oil inventories on liquidity via a difference-in-differences strategy. I show that the mean bid-ask spread doubles immediately after the release and volume increases by 32 percent regardless of the report’s content. Further, in line with the model, implied volatility drops and insider’s trading increase after the report’s publication.

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